What is the difference between commercial and residential property?
Both are tangible assets; however, they differ greatly when it comes to risk, capital, income and returns. To clarify, residential properties include family homes, apartments, and townhouses. A property owner either lives in the property or may rent it out for rental income. Those who rent residential properties are families and individuals which adds an emotional layer to this type of real estate as it involves working with people who are calling this property their ‘home’. Commercial property is non-residential in its function and is used for business activities.
Commercial property usually refers to industrial/warehouse buildings, office space, hotels, retail shops and public facilities. Owners typically lease all or some of the space to tenants, or they may operate their business from the property.
Unlike residential, commercial tenants are a business i.e., they are producing goods and services to generate an income.
What is the process for investing in commercial property in New Zealand?
Here is a basic outline of what an investor can expect and how Viranda can assist.
Commercial property investment is a significant undertaking and we respect the enormity of our clients decisions. It is important to take a long-term view and have an expert on your side who can shield you from market fluctuations and help you feel confident about the journey ahead.
First, Viranda spend time getting to the heart of your financial goals. There is never a ‘one-size-fits-all’ solution. Maximum returns is the common goal, but otherwise our approach is very tailored.
Success for us means building strong relationships with our clients and finding the very best properties to match your strategy.
Properties can look appealing on the surface, but Viranda draws on at least 150 years of combined experience to ensure the acquisition process is thorough and rewarding. We will confidently walk away from a property that doesn’t meet your financial goals.
When the right property is found, we can liaise on your behalf with your accountant, solicitor, real estate agent, bank and so on. Among this due diligence period, the strongest yardstick for us is simply asking – “If it were my money, would I buy it?” Removing the emotion and making it a pragmatic business decision is key.
Finally, our services do not stop at the first acquisition. We can appoint an Asset Manager to ensure you get the best from your property. These are optional service layers but are invaluable for our clients – saving time and stress, along with making the experience more financially-rewarding.
Commercial property is a ‘journey’ and Viranda will always review ways to improve and add-value to a client’s portfolio over time.
How does our fee structure work? Everything is transparent and outlined from the get-go. We act for you as the investor – every decision Viranda makes has your best interests at heart. Fees are only applied once a property is purchased.
Viranda’s networks within the industry, along with access to off-market transactions, make it a smoother investing process.
What does Asset Management entail and why is it important?
Commercial property is a business in itself. The services of a professional Asset Manager will shoulder stress (and time) for property owners. At Viranda, we take a ‘people-first’ approach in our management of assets. We recognise that people are the lifeblood of our business and success is measured by the long-term wealth we can build for every client.
One of the best ways we can achieve success for our clients is through exceptional asset management.
Our focus is creating long-term tangible wealth by adding value to every client’s property portfolio.
Since 1986, we have taken a partnership approach with our clients, along with proven experience, family values and common-sense. To meet individual goals, our property management is tailored for every client. We think on our feet and are result-driven. In general, you can expect the following services:
- At the acquisition stage (and ongoing), expect extensive research of the commercial property market to handpick investments that best suit your goals.
- Regular contact with associated professionals to ensure all services are met to meet your investment goals.
- On an urgency basis, Viranda can be on-call from tenants and related professionals to liaise on property management matters.
- Facilities management to ensure a building is maintained in good conditions, tenants are satisfied, risk is minimised, and productivity is enhanced.
- Ensure payment of rent and undertake regular property inspections.
- Operating Expenses (OPEX) reconciliation (plus review of all OPEX contracts). Collate, approve, and apportion all outgoings from the tenant and operating expenses due from the landlord. Including; rates, property insurance and body corporate fees.
- A full financial team to manage accounts and reporting on a basis that suits.
- Manage tenant compliance with lease terms, negotiate and manage rent reviews and renewals.
- Identify and discuss opportunities to add value to a client’s property to enhance lease security and increase gains.
What are the different asset classes or property sectors in commercial property?
Understanding the different real estate asset classes/property sectors is important for investors. The main types are:
- Office – properties range from single level office buildings in the suburbs, to multi-storey towers in a central business district.
- Industrial – includes warehouses, factories, depots, and business parks.
- Retail – covers a wide range of properties from a strip of shops to a major shopping centre. Categorisations commonly referred to include regional centres, sub-regional centres, CBD centres, neighbourhood centres and bulky goods centres.
- Hospitality – defined by a wide range of products including hotels, amusement facilities, travel centres, student accommodation, senior housing etc.
A single property can span a few of these sectors and is therefore called a mixed-use property. An example is office and retail tenancies. Factories often have office space as part of the building.
What are the upsides for investing in commercial property vs residential?
Acquiring commercial property can require more capital up front than a residential rental, so it’s perceived as more difficult to get your foot in the door. But with the right property, the gains in revenue will outweigh the gains in costs.
Typically residential real estate is where ‘ma & pa’ investors have felt most confident. But even post Covid-19, there has been a strong surge of new investors turning to commercial property. Low interest rates and tax efficiencies are making debt servicing more manageable. There are many reasons why commercial can have the edge over residential, including:
- Commercial property generally has a larger earning potential than residential property (e.g. cash flow).
- Typically, commercial property guarantees better returns than residential, with recent figures suggesting a yield of about 4 to 6 percent in Auckland. Compare that to residential yields (in the same locations) and you’d be lucky to find a rental yield of more than 3 percent.
- Unlike residential, commercial returns are bolstered by the fact that tenants pay for most of the operating expenses, such as rates and insurances.
- Commercial property income is stable, with lease agreements more robust than residential (where tenants only sign up for 6-12 months). With commercial property, your lease is generally negotiated for terms of 3 to 10 years, with rent reviews built into the agreement, and you also have a business as a tenant.
- Commercial property rent can be regularly reviewed (usually on an annual basis). Whereas the latest government changes for residential has shrunk the opportunities to increase rents.
- Commercial landlords are typically looking at 4 to 6 percent return after expenses, compared to their residential friends who are doing well to achieve 3 percent before expenses.
What are commercial landlords responsible for in New Zealand?
That’s where we help! Viranda has a thorough understanding of the expectations and legal requirements to protect both parties; owner and tenant. As a brief breakdown:
Commercial landlords are responsible for protecting their tenant’s right to quiet enjoyment of their property, eliminating risks to their tenant’s health and safety, ensuring that their property complies with building by-laws.
Who is responsible for repairs in a commercial rental property?
Tenants are responsible for all interior and exterior repairs to a commercial property they lease.
Who is responsible for commercial building insurance?
The insurance premiums for a commercial building is typically the responsibility of the tenant. The insurance itself for a building is generally insured under the landlord’s name.
Can a commercial landlord enter without permission?
Usually, a commercial landlord cannot enter a commercial premise without giving notice to their tenant. Doing so would interfere with the tenant’s right to quiet enjoyment and exclusive possession of their premises.
Who pays the different operating expenses of a commercial building such as annual rates, water, power?
In addition to rent, under most commercial leases it is the requirement of the tenant to pay the outgoings under the lease e.g., rates, insurance premiums, service contract charges for air conditioning, lifts, other building services and security services, maintenance and repair charges, yard and carparking area maintenance, body corporate charges and management expenses, redecoration charges and reinstatement costs etc.
Should I go to a commercial real estate agent to purchase a property, or can Viranda help?
What is Viranda’s point of difference?
Our business structure is unique to the industry in that we act directly for our client/investors – this is our strongest point of difference. Every client’s financial goals are explored and become the backbone to every decision we make. A tailored plan is put in place to help you build long-term wealth. Many of our client relationships are now intergenerational, which is further proof of our ‘people first’ approach.
As a further strength, Viranda’s relationships within the industry allows us to source and secure ‘off-market’ property transactions.
Finally, our relationship continues long after the transaction because most of our clients appoint us to manage their properties. Therefore, we stand by our acquisitions – because if we’re managing it, we need to be confident of its quality, its potential, and long-term fit.