Is Commercial Property Investment a good idea?
If you would prefer to listen to me read this blog post, please click on the play button.
More people than I can count ask me whether I would buy a rental property, by which they mean a single house which I would rent out. The answer is always that I have “ZERO interest in buying a rental”, particularly in today’s housing market because personally I just can’t see how the numbers work.
I simply could not be bothered with everything that goes with being a landlord:
Collecting rent, paying insurance, paying rates, maintenance, paying interest on the mortgage I would inevitably have to get, praying that the rent covered the mortgage, juggling the tax return, paying a property management company so I didn’t have to do any dreaded inspections. If I owned it outright it might make it worth it, I might make a decent return?
Actually... NOPE, I’m still not interested!
But buying a slice of the commercial building rental market is a much more interesting proposition. I would much rather have Bunnings or Ebos as my tenant thanks. Someone who is prepared to sign a lease for at least five years PLUS is a much more stable investment in my mind. Bunnings are unlikely to be meth addicts who move their trashy boyfriends in shortly after signing the lease (true story). Hey, if the toilet broke at Bunnings they could probably replace it themselves!
You know that big Bunnings building in your town or the cinema at the mall? They lease that building from someone else, they don’t own it. Commercial property could be anything from the building that houses a mechanic to the building that a huge power company head office is located in. A warehouse is a relatively simple concept and chances are that the tenant is going to add their own touch to it, without you having to do it for them. And by adding their “own touch” I don’t mean painting a feature wall. No, I mean they will bring in things specific to their business like plant and equipment, machinery, massive shelving systems etc.
But, who can afford to shoot out and buy a commercial property such as the big empty shop that is down the street or the warehouse in the industrial part of town, or a head office on Queen Street in Auckland? I’m concerned enough about having a lot of money tied up in the one house I own, imagine how panicked I would feel if I had 10x, 50x or 100x that amount tied up in one commercial property?
Say the tenant does go broke, the building burns down, the building is suddenly not what tenants are looking for. Having that stress would be the end of me!
But FEAR NOT because if you want to have a little piece of the rent they pay, then you can get involved by investing in one of the groups that owns and manages large amounts of commercial property.
Like an Index Fund (more on this shortly) that tracks the top 10 or top 50 companies on the NZX you can do the same with commercial property by way of Listed Property Trusts (LPT’s). Why just buy one property when you can buy a tiny slice of 80 and spread your money and your risk around and if after 10 years you want OUT then you can sell your units in these trusts on the share market.
There are a fair number of these groups listed on the NZX and each of them specialises in particular types of commercial property. They own millions upon millions of dollars worth of property and you can buy a slice of it when you buy shares in their company and earn returns by way of dividends.
Martins Hawes (an authorised financial advisor and most excellent author) is a big fan of these trusts and when I listened to him talk earlier in the year, amongst other things he mentioned that he had about 15% of his portfolio in Commercial Property.
Here is a list of New Zealand Property Trusts he rattled off during his talk:
Property for Industry (PFI) - www.propertyforindustry.co.nz
Goodman Property Trust (GMT) - www.goodman.com
Argosy (ARG) - www.argosy.co.nz
Stride (SPG) - www.strideproperty.co.nz
Kiwi Property Group (KPG) - www.kp.co.nz
Precinct (PCT) - www.precinct.co.nz
Being involved in one of the above is a long term investment. But they are a sound investment because a good quality commercial tenant is unlikely to go under and not pay their bills. If there is a downturn in the economy they are required to keep paying rent.
Tenants are tied into long leases, often many many years because they need surety in their business. Imagine sending Bunnings a letter saying “we are terminating your lease in three months”. Nope, these companies need long term rental agreements which for the investor collecting dividends is excellent news indeed.
As far as investments go some would consider it unexciting, but that is exactly what you want! Excitement brings risk and risk is not always an investor's friend. If you want a quick buzz you could go shopping in one of the buildings you are invested in instead...
Here is a breakdown of just one of these LPT’s…
PROPERTY FOR INDUSTRY - PFI
From their website and the NZX I learned that their average return to shareholders over the last 20 years is 9.5%, but for the last twelve months it has been 5.001%. They have 83 properties in their portfolio in Auckland, Hamilton, Mount Maunganui, Wellington and Christchurch occupied by 144 tenants who pay rent totalling $73.2 million. $73.2 million in rent! The portfolio is 99.5% occupied with a weighted average lease term of 4.78 years (all figures as at 30 June 2017).
Who are their tenants? Here is a snapshot:
And to throw another idea into the mix, instead of investing in just one of the above funds you can invest in ALL OF THE ABOVE FUNDS and a few others besides by way of a SmartShares NZ Property (NPF) Index Fund. This groups them ALL together under one umbrella for you to invest in.
How about that for being spoiled for choice!
When I started looking into the different funds I was surprised at the quantity available. And when you look into each one via their websites (also, use the ticker codes above and go onto the NZX.com to check them out) you can see what a huge spread of property they each have. All the big names are there as tenants.
Like any investment there is risk involved because they all have varying returns, debt etc to contend with, earthquakes that shake things up a bit and dividend payouts that rise and fall. But they also have capital gains, a strong NZ economy and a whole heap of building going on so the expectation is that there will be growth over the coming years. Because I well and truly understand that investing is a long term strategy I can see why Martin Hawes is a big fan. The businesses that rent these buildings all have long lease terms and will pay their rent on time. The flow on effect of that is that I will receive my dividend income regularly as well and my money is spread over a wide range of businesses who are the tenants of the premises.
I know a lot of people who have one or a few residential rental properties and ALL of them have stories to tell about the drama’s they have had over the years. All of them. As an investor I’m looking to be diversified and to me, having my future tied to only these houses seems like a flawed strategy. I know people like the thought of the security that ‘bricks and mortar’ apparently offers but I’ve been through the Christchurch earthquakes and bricks and mortar didn’t quite cut the mustard! If I ever wanted to become a landlord I would far prefer to do it by way of a commercial property group or Index Fund because everything is taken care of by the experts in the business and to use the old saying, all of my eggs are not in just one basket. I’m just putting a bit of cash up to enable them to do their job and as a reward for my faith in their business acumen they pay me dividends. Job done!
To end, I will quote Martin Hawes by saying “They won’t make you rich overnight but for a delightfully boring investment that seldom sees a cloud they are hard to go past”. Sounds good to me.