There are several important risk factors that need to be understood when contemplating a commercial property investment:

• Entry costs required to invest in NZ commercial property are normally much higher than residential property. As well as the higher capital requirement, banks are not prepared to lend as much on the value of the property (usually a maximum of 60-70% as opposed to up to 100% on residential), and interest rates on any loans are higher.
• The commercial investment property sale and purchase process will be far more complex. It is essential that professional advice is sought on all matters. An inquiry into the information provided by the vendor or real estate agent needs to be undertaken, and a thorough ‘due diligence’ process is necessary to ensure this information is correct and to determine whether a particular investment is suitable.
• Legal factors must be taken into account. Zoning and council restrictions may prevent you from using the building in certain ways, so find out any restraints before making the decision to purchase.
• Commercial property in New Zealand is more strongly affected by economic conditions, capital values are linked tightly to the rental yields, and there is the additional complication of fluctuations in certain business sectors affecting returns from tenants.
• The lease agreement is crucial; whereas in residential property there is the three L’s of Location, Location, Location, in commercial property investing the three L’s are Lease, Lessee and Location. The content of the lease affects the property’s capital value. The length of tenancy and the ability of the tenants to remain solvent are important.
• Leases are likely to be longer than those for residential property, but the gaps between lessees will also be longer as there is generally less flexibility in leasing a particular space and there are fewer potential tenants.
• Retail tenants are at the mercy of the economic times than most tenants. Downturns lead to businesses failing or closing, leaving you potentially with an empty shop – and it can be a while before a replacement tenant can be found.

Despite the risk factors, there are good reasons to invest in the New Zealand commercial property market:

• Returns on commercial property investment in New Zealand are generally higher than for most other forms of investment, including other property investments. Income from rental yield is strong, and commercial properties rely less on capital gain to provide value for their investors.
• Tenants are liable for repairs, and often outfitting the space for their own needs. They are also usually liable for rates and insurance. This allows a better net return for the commercial property investor in New Zealand.
• Lease agreements are generally long-term (sometimes as much as 10 years or more), giving the investor stability and allowing long-term cashflow predictions and budgeting.
• Tenants are less likely to default on rental payments, especially if a personal guarantee is in place.

What makes for a good commercial property investment in New Zealand?

When making the decision to invest in the commercial property market, you should consider:

• Location: still a very important factor when considering New Zealand commercial property. A property close to transport and infrastructure, well lit with parking facilities, and with appropriate businesses around it is a good start. Research any future developments in the area; for example, if you are looking at buying a retail block that includes a dairy, and a supermarket is being constructed next door, you may want to reconsider investing. Auckland and Christchurch are popular cities for commercial property investment, but other main centres are also worth considering.
• Building: look at the building itself; Are there opportunities to add value?
  Does the building have appropriate facilities to attract and keep ideal tenants? Check out the building’s air conditioning, wiring and electronics and any potential earthquake resilience issues or leaking – remediation of any sort can be expensive.
• Tenant: having good tenants can make or break your commercial property investment. Look for tenants who are reliable, are willing to sign a long-term lease, and present a low risk of default on rental payments. Remember that having successful tenants will mean your investment is secure; by investing in commercial property in some respects you are investing in the quality of your tenants’ businesses.

Finding commercial investment properties for sale in New Zealand is a matter of looking through real estate advertising or contacting specialist agents to find what’s available, followed by meticulous research, analysis and some number crunching before making a decision.

Investing in commercial property really does offer some great rewards, however much care needs to be taken by the investor, not only because they will generally be parting with a large sum of money, but also because of the inherent risks involved. Good luck!