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More evidence of foreign investor confidence in N.Z. real estate market “seeing foreign investors looking to diversify their portfolio with good quality assets in a stable environment.”

4 July, 2012

Aviva looks to extend holdings in NZ property – Property – NZ Herald News.

New Zealand provides a stable economic and political environment and is perceived by many as a safe-haven in these uncertain economic times. Carefully selected property investments- residential and commercial – can provide reliable cash-flow with capital growth potential. Contact me if you are interested in being on my investor database and/or wish to find out more about investing in New Zealand property.

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New Zealand property investment opportunities – Security and Cash-flow in Dunedin.

26 June, 2012

With New Zealand deposit interest rates at record lows and forecasted to remain low for quite some time, many investors are now returning to property as an alternative investment option that provide relative security and generates reasonable cash returns. Also, with mortgage borrowing rates also at record lows, it makes good sense to consider the effect of gearing on the potential return on equity. I have prepared some projections on several notable properties in Dunedin to show how gearing may work based on current rates. My assumptions re the mortgage borrowing rates are 5.75% (3yrs) for residential and 6.0% for commercial.

129B Forth Street, Dunedin (‘St David Heights’)

 

This is a modern 7-studio room property in a prime university location. It has an outstanding rental history. The vendors have just reduced the asking price from NZ$1,150,000 to NZ$1,090,000. Note that the property is fully managed by a professional property management company, and the financial projections are inclusive of the management costs, together with all other normal operating expenses, including body corporate fees.

Projections (estimate only)

Purchase price:                                                          $1,090,000

Borrowings (60%):                                                     $654,000

Cash input (equity of 40%):                                        $436,000

Annual NET cash-flow (EBDIT):                                  $69,718

LESS bank interest (5.75%):                                       $37,606

NET annual cash flow:                                               $32,133

Equates to pre-tax return on equity                           7.4% (at 60% gearing)

In the interests of conservatism, the projected return excludes any provision (upside) for potential capital growth, which has historically been very good in the university investment market.

 

90 Crawford Street, DUNEDIN

 

This is a high profile commercial building on the main northern arterial traffic route (State Highway 1) into Dunedin CBD. It has very good street exposure to Crawford Street, and also a second frontage onto Bond Street. Other features:

  • Freehold tenure in one title (approximately 701m²)
  • Solid reinforced concrete construction with recent renovation work completed internally
  • Total net income of $131,636 per annum plus GST
  • Favorable lease configuration with six separate lessees strengthening the investment profile of the property
  • Strong business profile with well-known tenants including Gordon Creighton  Lighting, and Jennian Homes as the main retail tenants

Projections (estimate only)

Purchase price:                                              NZ$1,470,000

Borrowings (50%):                                         $735,000

Cash input (equity of 50%):                            $735,000

Annual NET cash-flow (EDBIT):                      $126,636

LESS bank interest (6.0%):                              $44,100

NET annual cash flow:                                    $82,536

Equates to pre-tax return on equity               11.23% (at 50% gearing)

  

598 Castle Street, Dunedin (Units 1 & 2)

 

 These Castle Street flats are impressive student investment properties in absolute prime location adjacent to the university. They comprises2 six-bedroom adjoining unit-titled flats, approximately 10 years old with two bathrooms on different levels. Other points:

  • Durable material construction, aluminum joinery and low maintenance sections.
  • Located in the heart of the prime campus area, these properties have strong appeal to students who compete to rent these flats every year;
  • Rents were increased to $130 per room for each flat in 2012 giving an annual income of $40,560  per flat which provides a yield of 7.2% on asking price;
  • The owners are advertising rents of $135 per room for 2013 in line with market increases. Unit 1 has already been signed for 2013 in early June this year at $135 per room;
  • Within easy walking distance of University campus and Otago Polytechnic and within one block of the University’s newly proposed Marsh Study Centre; saving the walk through campus to the Central Library to study;
  • Off-street parking which is very attractive to students in an area where parking is limited;
  • Excellent rental history with full year leases at market rent levels.

Projections (estimate only)

Purchase price (for 1 unit):                          NZ $565,000

Borrowings (70%):                                         $395,500

Cash input (equity of 30%):                            $169,500

Annual NET cash-flow (EBDIT):                      $36,700

LESS bank interest (5.75%):                           $22,741

NET annual cash flow:                                    $13,959

Equates to pre-tax return on equity               8.2% (at 70% gearing)

In the interests of conservatism, the projected return excludes any provision (upside) for potential capital growth, which has historically been very good in the university investment market.

66 MacLaggan Street, CITY TERRACE

 

Brand new (estimated completion end August 2012) units an easy walking distance to the city centre, and close to schools like Otago Boys, Otago Girls, Kavanagh College.

  • 2 units – fully furnished with carport and lockup – only $282,000 and $288,000
  • This is part of the next stage of the existing City Terrace complex, which already comprises six fully completed units with very strong tenant demand, mainly from professionals and senior students. These new units already have tenants wanting to commit to long leases (at least 12 months) at $410pwk.
  • The modern design and fit out provides a spacious living area. An energy efficient heat pump, double glazing and good insulation help provide a warm and comfortable environment.
  • Ideal as ‘minimum fuss’ investment, for owner-occupier, or as a ‘lock-and-leave’ town base.
  • Professionally built by G.J.Gardner Homes, with a builders guarantee.


Projections (estimate only)

Purchase price:                                             NZ $282,000

Borrowings (80%):                                         $255,600

Cash input (equity of 20%):                            $56,400

Annual NET cash-flow (EBDIT):                      $17,074

LESS bank interest (5.75%):                           $12,972

NET annual cash flow:                                    $4,102

Equates to pre-tax return on equity               7.3% (at 80% gearing)

Note: The lower return of this property reflects the fact that it is new.

All examples are projections only and should not be relied upon. As always, you are advised to obtain your own independent professional advice. All figures are shown in $NZD.

As these examples illustrate, it does make sense to consider alternate ways to structure your investment and maximise returns, especially in the current low interest rate environment. These examples are necessarily simple, and do not include allowance for capital growth potential or personal tax savings, which may further enhance the overall return. Overseas investors should also consider exchange rate issues and prevailing laws and regulations that may be country specific. Note that the above examples do NOT require approval from the N.Z. overseas investment commission which makes them a relatively simple N.Z. investment.

Please feel free to contact me peter.gale@colliers.com if you have any questions or comments, or wish to find out more information about these or other investment opportunities. You can also check out my profile here.

N.Z. Heritage properties face 500% increase in insurance bills – Landlords.co.nz

19 June, 2012

Owners of heritage buildings are being warned they may find it hard to get insurance – and if they do, it will come with a high pricetag.

via Heritage properties face 500% increase in insurance bills – Landlords.co.nz.

Kiwis rekindle love with property – New Zealand

18 June, 2012

While property prices are likely to pick up in future, a rental investment should stack up as just that – an investment. Properties are available at 8 per cent or 9 per cent gross return. Look for those – then any capital gains are just the icing on the cake.

via Finance: Kiwis rekindle love with property | Rotorua Property | Real Estate News for Rotorua, New Zealand.

Sellers Property Market Says Bank Of New Zealands… | Stuff.co.nz

15 June, 2012

Sellers Property Market Says Bank Of New Zealands… | Stuff.co.nz.

New Zealand Commercial Property …Popular Ways to Invest (Part 2)

12 March, 2012

Last month I discussed the pros and cons of investing directly (DIY) in New Zealand commercial property, as well as listed and unlisted property funds.

Another increasingly popular way to invest is through a ‘proportionate title’ property syndicate.   This is perhaps the most direct way to invest in commercial, next to DIY. Proportionate title syndicates are covered by the Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice 2002.  This means that, instead of a prospectus and investment statement, the promoter of the scheme issues an ‘Offeror Statement’. This statement contains the key information about the investment. A proportionate title arises when there is more than one owner of a property and each person owns a share/s. Where there are multiple owners of the property, each owner is entitled to their own certificate of title for their share/s. Such titles are registered through the Land Registry Office and can be sold or bequeathed as with any other Certificate of Title.

Proportional property syndicates allow investors to invest directly in commercial property with a relatively modest level of capital – sometimes as little as $25,000 per title. Because the property is fully managed, an investor doesn’t have to be an expert in evaluating, owning and managing buildings. This means that the investment is relatively ‘passive’. Investors can also spread risk by investing across a number of syndicates.

Where property is owned in proportional ownership, each owner owns a specified share of the whole property. For example, an owner of 10%, would own 10% of the whole land and buildings. Profits and losses, including depreciation, are apportioned accordingly, for tax purposes.

It is possible for proportionate ownership scheme investors as a group to borrow part of the money needed to complete purchase of a commercial property. As such, particularly in the current low interest rate environment, most schemes will fund the purchase with a combination of borrowings and investor equity, in order to gear up the return to investors. Bank borrowings are often structured on a ‘non-recourse’ basis which means that, in the event of default, the bank can only recover the amount lent to the Nominee from the security given, being the property, and not from any of the subscribers/investors.

Property Managers generally operate a secondary market to facilitate sales for an investor who wishes to exit. However, there are no guarantees of a quick sale because, as with owning your own building, this will depend upon the state of the market and the building performance / leases at the time. As such, proportionate titles should be generally considered as a long-term investment of at least 5 years.

Each investor in the scheme has to sign a detailed agreement with the Promoters of the investment opportunity binding themselves to common rules that will affect every investor. Such rules may commonly prevent an individual owner mortgaging their proportionate title as collateral security for other investments or business.  They will also usually be accompanied by a detailed management agreement with a professional property manager.  They control how a proportionate title share is sold. For example they require a selling investor to first offer their share to the other investors before sale to members of the public. They may prevent individual owners from dealing with the tenant and require that to be done by the professional property manager. They will also provide how decisions of the owners are to be made and when and how meetings are to be held.

In some special cases, investors with at least $500,000 can also invest in more ‘intimate’ syndicates with a handful of investors. These typically include a development, or value-add component and, while they may be perceived as speculative, the potential returns can be significant. Let me know if you are interested in this type of investment as they are often made available directly to a pre-qualified database instead of being publicly advertised.

N.Z. Commercial Property …Popular Ways to Invest (Part 1)

20 February, 2012

With continued low bank interest rates there is now a significant gap between the cost of capital (mortgage rates) and the cash return potentially available from commercial property. There are several ways to invest in commercial property, with the most common being the following:

DIY Go out and buy a building yourself. Some investors like to be able to drive past their own building and have direct control over what happens. There are also the advantages of being able to gear (borrow) against the property, with associated tax benefits and the potential to leverage returns. However, because much of the ‘quality’ property is in the $5M+ price range, this is out of reach for many single investors. At the more affordable ‘sub-$5M’ level, competition appears to be fierce for the few good properties that come up. As such, this seems to be driving down yields, with anecdotal evidence suggesting that the cap rates are now creeping down to around 7% for ‘prime’ buildings in this hotly contested price range.

The Canterbury earthquakes have also significantly reduced the number of quality buildings available. However, perhaps the biggest single issue now is the change in insurance coverage. The Earthquake Commission no longer insures commercial buildings and commercial excesses that were previously 2.5 per cent of the loss incurred may now have risen to 5 per cent of the site value, with those for pre-1935 buildings being even higher. In addition, premiums have increased markedly – up to 350 % for those buildings built before 1935. As such, investors should always address the cost of insurance and the insurability of buildings before committing to purchase. Without insurance cover you will not be able to secure a mortgage, and even if you were able to purchase debt-free, the building may be very difficult to sell in the future if potential purchasers cannot obtain funding.  It is also important to investigate the changes in insurability for tenants. If tenants are unable to secure cost-effective business continuation insurance then this may affect the ‘lease-ability’ and therefore the value of the building. While this does not rule out older buildings as an option, any due diligence should consider the likelihood and cost of earthquake strengthening up to an ‘acceptable’ standard. Because councils and insurers etc. are still coming to grips with the post-earthquake environment, it may sometimes be difficult to get a definitive answer about potential upgrade requirements and costs. The absence of this certainty does increase the risk profile of the investment.

While owning your own commercial building may have some significant benefits, it is important to undertake thorough due diligence that balances the advantages against the potential risks. Particularly in this post GFC (Global Financial Crisis) environment the conventional wisdom is now to “hope for the best but prepare for the worst”. Some investors may also find that other forms of commercial property investment are better suited to their circumstances.

Property Fund – Listed. There is a choice of property funds listed on the NZ Stock Exchange. Each fund typically has several properties, which in theory spreads risk. People invest by buying shares in the fund through a registered Prospectus, in much the same way as they would any other publicly listed company. However, because the share market is typically driven “by fear or greed” the share value can fluctuate quite significantly.  As a result, the share value often bears no relationship to the underlying asset value. For example, in recent years the shares in some of these funds have traded well below the NTA (net tangible asset) value. A major advantage of publicly listed property funds is that the shares can be readily traded at ‘market price’.

Property Fund – Unlisted. These have the same characteristics as listed property funds. However, because the shares are not publicly listed and traded on the share market, their value is generally closely linked to the NTA (net tangible asset) value per share. As such, values tend to be more stable. On the flip side, the shares are not as easily trade-able, although most funds will normally have a ‘secondary market’ to facilitate buying and selling.

Property funds generally pay out their tax-paid profits as dividends. Some property funds are now set up as PIE’s (Portfolio Investment Entity) which may provide tax benefits depending on the investor’s specific tax situation.

In Part 2 next month I will discuss ‘Property Syndicates’ – another increasingly popular form of commercial property investment.