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The pros and cons of commercial property investment
As with any investment, there are always benefits and risks that you should weigh up before making any commercial property investment decisions. A financial adviser can always help in working through what these are and how they may suit your risk profile. In short, these are some general pros and cons of commercial property investment.
Benefits of commercial property investment
| Potentially strong returns | Combination of the potential for capital gain and income. |
| Income stability | Commercial properties that have longer leases lock in tenants for longer periods. |
| Tax benefits | Depreciation deductions are available for commercial buildings (but not for residential buildings). |
| Diversification | Commercial property can assist with diversifying investments across different asset classes. In addition, there are lots of different types of properties to diversify into. |
| Capital gains | Commercial property investment has the potential for capital gains if the property value increases. |
| Longer lease terms | Usually leases are between 3-15 years as opposed to six months for residential property. This provides longer income certainty than shorter lease terms. |
| Reduced overhead costs | Unlike a residential tenant, the commercial property tenants sometimes pay for all the repairs, maintenance, property management fees and rates in the building. |
| Net distribution returns | That will often compare favourably to residential property investments (after factoring in gearing). |
| Potential to add value | As with residential property, it is possible to improve the value of a commercial property investment, however, it will require planning and incur costs. |
Risks of commercial property investment
| Financial performance of tenants | Investment income is derived from rent paid by the tenant, placing importance on the financial performance of tenants. |
| Stock Market Volatility | If you are investing in commercial real estate via a listed entity on the NZX/ASX, the fund can be influenced by market sentiment as well as the underlying value of the assets. |
| Valuation risk | Commercial property investment has the potential for capital losses if the property value decreases. |
| Liquidity of the property fund | Different types of investment have different liquidity levels:
*Centuria, unlike other fund managers in the market offer their investors the benefit of a secondary sales market, whereby if investors wish to sell their interests, the sale is facilitated by Centuria first notifying the scheme of the available interests and, if necessary, the full database of investors. Centuria will provide background information to the investor wishing to sell, in order for them to price their interest. For more information about this, please contact Kerri Ewart, Secondary Sales Manager – kerri.ewart@centuria.co.nz |
| COVID-19 risks | Any failure of a tenant to pay rent, rent abatements or a reduction in demand will impact the Fund’s revenue. A downturn in the property or share market will have an adverse impact on the value of the fund and return to investors. Existing risks may also be affected or heightened. |
Other things to consider
| Gearing of the property | Commercial investments typically have associated borrowings from a bank, which enables access to higher value assets, and potentially higher value returns. The gearing level, which reflects how much debt is being borrowed, is important. Gearing can magnify gains or losses. Centuria’s gearing of its property assets is typically between 35%-45% of the initial value of the property, which is relatively conservative. |
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