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Good tenants determine property value

Like every other aspect of business, the property sector is governed by a number of principles and ideals, aimed at optimising performance and profit.

The ability of a person to raise and service the mortgage would be the primary aspect of investment in the property sector. This would in turn depend on the location of the property and the ‘quality ‘of its tenants.

There is no winning formula but some basic investing knowledge would be useful. The yield is always directly proportional to the risk involved; higher the risk, higher the yield and vice-versa.

Media reports on failed finance companies that spell loss of millions for investors have undoubtedly instilled fear in the minds of investors.

This is a prime example of investors preferring to invest in a finance company than in a commercial bank, where the return would be lower. Property investment works on a similar principle.

But the difference is that if your tenant vacates the property, you are left with a building as an asset to salvage, with the ability to find another tenant.

You should always remember to purchase a property in a proper location with the strength to grow.

Strategic location

Take for instance, major supermarket chains. Their locations are chosen after an in-depth study of the location, its market potential and public patronage. Your business interest and property in such a location will enable you to choose a good tenant with ease and remain profitable.

Multiple tenants enable you to spread the risk and investment in a group of retail shops is considered a wise choice.

While the retail sector depends on foot traffic, you should ensure that your property attracts a large number of people to ensure the success of your tenants and to enhance your ability to find a new tenant should a need arise.

You should explore ways to improve the cash flow through billboards or cell phone towers. You would do well to find out if your site is suitable for advertising campaigns of well-known companies and brands. Be creative and examine if another shop or office can be developed on your site.

Strong tenant covenants will demand low cap rates even in most challenging times, because people look for properties with higher rate of capital growth.

New Zealand does not suffer erratic inflation and hence long-term investment would foster capital growth.

Wisdom rules

Reading books and articles on property development and investment will also be useful in the long run.

A smart investor is investor is one who looks after his or her tenants, maintains the property and looks for opportunities to add value.

Today’s commercial market can be very unforgiving if you make mistakes in your acquisitions. It is therefore important to study the market well, do some research and choose wisely. Meet people who matter, such as real estate agents and leasing agents and discuss with them the area and its potential for growth.

You could also consult with existing tenants on the performance of the property. A Land Information Memorandum (LIM) Report from the City Council would be useful in assessing the property from all angles.

As I have mentioned in my previous articles, it pays to have buffers in place. This would include established credit facilities with leading financial institutions and setting aside surplus cash for use in an emergency.

Mahesh Ranchhod is a Director of the Ranchhod Group of Companies based in Auckland. Phone: (09) 3031353 Mobile: 021525569

Email: m.ranchhod@xtra.co.nz Website: www.ranchhodgroup.com

The Group incorporates New Zealand and Australian Companies and Trusts designed to invest in commercial properties and manage them in Australia and New Zealand. The above article should be taken only as a guideline and not as specific advice. Mr Ranchhod 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.

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