Timing is a crucial element in commercial investing, just as important as the location.
The recent economic climate has given cashed-up investors an opportunity to purchase property at historical lows.
The best deals are done in the recession, provided investors have access to cash.
Although the residential property market has reached the bottom of the cycle, its commercial counterpart is yet to reach its low end.
Stock prices and rents continue to fall, there are more properties on the market, auction rooms are slowing down in terms of the number of sales and properties are getting harder to lease, with vacancies increasing.
Banks are still tight in terms of willingness to lend on commercial ventures, typically lending only up to 50% or 55% of their value, depending on location, tenants and lease term. Funding for completely vacant properties is almost impossible, unless you have impressive cash reserves.
I see the situation continuing until the middle of 2011 when, if we are lucky, green shoots will start to appear. However, much of it centres on world markets and how they recover.
Interest rates, which are due to start rising from the middle of next year, will impact the commercial sector, which will be a confidence-breaker for many.
Now is the perfect time of the cycle to buy commercial assets, if you have the funds.
However, be careful of how much attention you pay to details, for example cap rates.
Although there are deals around, with 5.50% to 6% cap rates, you must consider a building’s potential and look at the bigger picture, rather than just the numbers.
For example, Queen Street in the Central Business District of Auckland and Lambton Quay in Wellington traditionally have extremely low cap rates, but enjoy phenomenal rents and land value.
I have been in situations where I have paid too much attention to detail, following cap rates too closely and crunching the numbers too hard and then regrettably not purchasing the property.
This does not mean attention to detail is not important, but sometimes it could be a barrier in closing the deal because you are not looking outside the box.
Because you are dealing with larger numbers in commercial property, it is not an easy decision to make; you may at times take wrong decisions, costing valuable time, opportunity and money.
The fear of borrowing too much or losing tenants are often barriers to signing on the dotted line.
If you do due diligence, careful not to put too much emphasis on cap rates, have finance available and have checked out the tenants’ profile, trust your instinct and determine if it is a good deal.
I use the following guide in purchasing risky deals – if you can live with the mistake, then go for it! It is after all a risk taker’s world.
You should also talk to local agents and valuers to get a feel for the market.
If you are looking in a particular area to purchase commercial property, study the area and examine the number of properties available for lease and talk to agents specialising in the area.
Ask why properties in the area are not attracting tenants, especially if some properties are under development.
You must always remember that there are many variables in a market with highs and lows and it is usually the educated and well-informed players that survive during these property cycles.
We now live in a market where property values do not always go up as they have traditionally, which would be perfect for investors with available funds.
Once finance becomes easier to obtain and there is more confidence in the market, you may have missed the boat in terms of timing the bottom of the property cycle, as the market is probably on its way up again.
Timing is the key to success in all ventures.
Mahesh Ranchchod is a Director of the Ranchhod Group of Companies based in Auckland. The Group incorporates New Zealand and Australian Companies and Trusts designed to invest in commercial properties and manage them on both sides of the Tasman. The above article should be taken only as a guideline and not specific advice. Mr Ranchchold absolves himself along with the management and staff of Ranchhod Group of Companies and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.
