Dairy Payout Should Dodge Woes – Remarkably Good Economic Outlook
“…the medium-term outlook for the New Zealand economy, particularly in the rural sector, looked “remarkably good – the best in 40 years”. (Cameron Bagrie – ANZ National Bank Chief Economist)
via Fonterra | Dairy Payout Should Dodge Woes | Stuff.co.nz.
New Zealand Ranked 5th in the World for Living Standards
United Nations Human Development Index | New Zealand… | Stuff.co.nz.
This report is further evidence that, relative to the rest of the world, New Zealand is a great place to live and invest.
How much is that commercial property worth…to you?
I often field calls from clients considering investing in a commercial building. In times when bank deposit rates are low and other markets are volatile, a good commercial building can provide a reliable long-term cash flow, together with inflation proofing capital growth potential and the security of bricks and mortar. However, there are traps for the unwary and as such it is important to do your homework – especially in today’s turbulent markets. This article will consider some of the key things a prospective commercial real estate (CRE) investor should consider.
Your own position – what type of commercial real estate investment suits? Every investor has their own specific circumstances and what is a great investment for one investor may be less than ideal for another. It is important to be objective in this respective.
Financials – the numbers talk! Many investors rely too much on the capitalisation rate (‘cap rate’) which is the rate of return on the property. A cap rate for the property being evaluated provides the benchmark comparison to other similar properties. The market says that “given this type of property, in this area, at this point in time, what return is considered realistic?
Example: Assume that I have a property that cost $2,000,000. The net rental is currently $130,000 – a 6.5% return. Other similar properties in the same market are currently selling for approximately 6.5% return. Hence, 6.5% is the current ‘cap rate’ – the rate that investors are generally prepared to accept for this type of property. I soon find that it is possible to increase the net rental to $160,000 –an 8.0% return on my original purchase price. However, because the market will still accept 6.5% return for this ‘type’ of property, the value of my property increases to $2,461,538 – an increase of over $461,000 or 23% on my original investment. This can also work in reverse where for example, in a market of high inflation, the required return (cap rate) may increase. Let’s say the prevailing cap rate increased to 9%, the value of my building, despite a hefty rent increase to $160,000, would now be approximately $1.78M, a drop of $220,000 on my original purchase price!
While a cap rate is a simple comparison point, it is only as reliable as the assumed cash flows behind it.
Most institutional investors run a DCF (discounted cash flow) analysis over their projected holding period to arrive at a Present Value (PV). The PV of these cash flows is influenced by the quality and continuity of the cash flows. The IRR (internal rate of return) is also a useful complementary measure. Ensure that, as part of any analysis, you are comfortable with the underlying assumptions, such as vacancy period, maintenance costs, capital growth rate etc. You should also obtain a valuation report, which would normally be required as a matter of course if you were seeking finance.
The Lease/s – How tight are the leases, how many years to expiry, what are the rights of renewal and how do they compare to current and expected market conditions? Are rental increases attached to CPI? Are they ratcheted (i.e. can go up but not down). Does the tenant pay all the outgoings? Renegotiating leases on turnover may make or break your investment. Consider a nice building with 5 years remaining on the lease to a relatively creditworthy tenant. One of three things will happen at the end of the lease:
- Demand for the property type at this location will have increased to the point where new buildings are being constructed and market rents will reflect replacement cost and then current cap rates. You should be in a strong position to negotiate a good rent increase.
- Demand will have remained constant and rents will be sluggish. Above market leases will not be renewed without concessions. Below market leases will be renewed at increased rentals or new tenants found.
- Demand will have decreased and competition will be severe. Rents may sink to the point where owners mothball or abandon buildings.
The tenant/s – How many tenants are there? Are there one or two ‘anchor’ tenants? How reputable and financially secure are they? Are they in a growth industry? Are they a national / multinational business with a strong reputation? Is any ‘downsizing’ likely (e.g. government departments)? I suggest meeting with the tenants if at all possible, and understand their future plans and requirements. The tenants may be able to give you some ‘inside knowledge’ on the building and any potential issues. It is important also to note that lease guarantees provided by tenants are generally worthless. If a tenant goes into liquidation, then you will normally be well down the queue of creditors. As such, the ideal is a ‘substantial’ tenant/s in a profitable industry.
The Building and the Site. A LIM (Land Information Memorandum – New Zealand only) obtained from your local council can be very useful in helping to identify issues on the site and/or any potential development restrictions. Local bodies in other countries should have their own form of a ‘LIM’ that contains records relating to the property.
You should also do a thorough inspection of the property yourself. Become familiar with the site and the neighbourhood. You may even be able to access the records of the building manager (if any) to show if there have been any ‘abnormal’ items arise. There are ‘A buildings’, ‘B buildings’ and ‘C buildings’, and then there are really cheaply built buildings.
Be particularly wary of older buildings, especially given the current issues (particularly here in some parts of New Zealand) surrounding earthquake proofing and insurability. The last thing you need is to discover 2 years later that you have to retrofit stabilising beams and/or be faced with massive insurance increases. Consider also the implications for tenants in obtaining business continuation insurance. A building without a tenant is not worth much! In most cases a building inspection report will be a critical part of your due diligence.
Consider also the type of building. If it has been ‘purpose built’ then how easy would it be to find new tenants in the future? Or, is it a multi-purpose building that will readily attract new tenants or may be easily modified for a range of different needs e.g. smaller office spaces. Try to target buildings that are ‘future-proof’.
If this all sounds a bit too much then you may be better off considering investing in a reputable syndicated commercial investment/s, where this due diligence would normally have been taken care of, management is in place and you can spread your risk across a number of different buildings.
Feel free to contact us if you’d like to find out more about investing in New Zealand property.
Why Invest in New Zealand Property? » New Zealand Property Based Investments.
Ranked Highly by Independent Surveys
New Zealand consistently ranks as one of the world’s most competitive business locations in international surveys like the Global Competitiveness Report. Strong economic fundamentals, free movement of capital and active government support for foreign investment create an ideal environment for profitable international partnerships and overseas investment.
Influential American magazine Forbes has recently (October 2011) rated New Zealand the second best place in the world to do business (October 2011), behind Canada. Forbes says New Zealand governments have overseen substantial change during the last two decades – “Over the past 20 years the government has transformed New Zealand from an agrarian economy dependent on concessionary British market access to a more industrialized, free market economy that can compete globally,” it said.
New Zealand topped the list for cutting through red tape, a lack of corruption, investor protection and personal freedom. The report considers 11 different factors for 134 countries including property rights, innovation, taxes, technology, corruption, freedom (personal, trade and monetary), red tape, investor protection and stock market performance.
Key economic facts
- 1.4 percent real gross domestic product (GDP) growth (year ending September 2010).
- 1.4 percent growth in inward foreign direct investment (FDI) stock in 2009-10.
- Ranked third worldwide in overall economic freedom (Fraser Institute Economic Freedom of the World Annual Report, 2010).
- No capital gains tax.
New Zealand is ranked by the World Bank (2011) out of 183 economies as:
- #3 for ‘Ease of doing Business’
- #1 for ‘Starting a Business’
- #1 for ‘Protecting Investors’
- #2 for ‘Getting Credit’
Refer World Bank Report – Doing Business in N.Z. for the full report
New Zealand’s Economy
New Zealand is primarily a commodity based, export driven economy. It is a highly efficient producer of premium agricultural and horticultural products including dairy, meat, vegetables, fruit and wine. New Zealand also has a vibrant tourism industry – each year New Zealand welcomes around 2.5 million international visitors who spend approximately $6 billion during their time in New Zealand. New Zealand’s strong international profile along with increasing air capacity to the region has helped drive growth.
New Zealand is famous for its clean, green environment, with magnificent mountains and sparkling waterways. At the same time, New Zealand is a dynamic first-world society with sophisticated cities and a vibrant arts and cultural scene. Admittedly isolated, it is precisely because of that isolation that New Zealand is increasingly regarded as a safe haven for people wanting a peaceful yet productive lifestyle. The combination of natural beauty, geographic isolation, economic growth and political support means that New Zealand is an attractive destination for investors.
Population dynamics
In 2011 New Zealand has an estimated population of approximately 4.4 million, and is projected to eclipse 5 million in the mid-2020s and reach 5.75 million by 2061.
It is projected that 86.1% of New Zealand’s total population growth over the period 2006 to 2026 will take place in the 12 cities, with two thirds (65.9%) of total growth occurring in the five cities in the Auckland region. In absolute numbers, Auckland and Manukau will make the greatest contribution to New Zealand’s total population growth. (source: Big Cities info)
Overseas Investors
Buying from overseas is simpler than it sounds. The New Zealand Government actively encourages overseas investors to invest in New Zealand, recognising the important contribution foreign investment makes to the development of New Zealand’s industry, resources and community. The index of economic freedom (complied by the Wall St Journal) ranks New Zealand in the top five out of major OECD nations. This takes into account openness of trade policy, tax rates, monetary policy, wages, unemployment, inflation levels, investment flows and regulation.
Some of the many reasons to invest in New Zealand property include:
- A safe and secure investment environment
- Economic and political stability
- Abundant natural resources: water, arable land and energy
- Free of corruption
- Extensive free-trade agreements
- Active government support for investment
Exceptional rental yields
A positive rental yield is important for property investors to cover the costs of funding a property plus rates, management, insurance and other costs. Maintaining a positive rental yield depends on the principal of supply and demand. There is a current shortage of properties in high-growth areas throughout NZ.
Generous tax incentives
- The tax structure in New Zealand is highly favourable for investors. There are few places in the world that can offer such incentives and flexibility within tax law which makes investment not only easy, but profitable.
- No stamp duty: In 1999 the Stamp Duty Abolition Act amended the Stamp and Cheque Duties Act 1971, stating that instruments executed after 20 May 1999 no longer attract conveyance duty or lease duty, and do not need to be submitted to the department for stamping.
- No wealth or death duty: Unlike many other countries, New Zealand has no indirect taxes on wealth. Inheritances on death can be passed to beneficiaries without estate duties applying.
- No land tax: The government does not tax owners on the value of their land.
- No capital gains tax: New Zealand has no capital gains tax for most property investors. So long as property is bought for long-term income rather than short-term purchase and re-sale the capital gain is not taxable, nor is any capital loss claimable. In practice so long as the investor is not in the business of buying and on-selling “flipping” properties, or buying, renovating and quickly re-selling the property you are unlikely to pay capital gains. This area of the law is complex, intention at time of purchase is the key and it is wise to consult a New Zealand accountant PRIOR to any purchase.
- Personal tax rate: New Zealand has low personal tax rates compared to the Western world.
- No sales tax on property or mortgage transactions. The only direct property taxes are property rates which are levied by local Councils to provide Council services such as roads, water, rubbish collection and community services such as libraries. Rates are based on the value of the property and would vary between NZ$1500 and NZ$3000 per annum for a typical median value house or apartment.
Tax effectiveness
In New Zealand, there are a multitude of tax-deductible expenses. These include:
- mortgage interest, not capital repayments
- insurance of the property
- property management fees to find tenants, collect the rent and maintain the property
- accountancy fees
- valuation fees
- bank fees
- property rates
- legal fees associated with financing, not purchase of the property
- relevant magazines, books and fees for Property Investment courses
- reasonable travel and expenses for managing property portfolio – your next New Zealand holiday could become a tax deduction!
Other Considerations for Overseas Investors
No Exchange Control
There are no exchange controls effecting remittances to and from New Zealand. A free flow of capital in and out of the country is permitted.
OIO Approval
Foreign investors wishing to acquire commercial property in New Zealand can freely do so without the approval of the Overseas Investment Office (OIO) up to a level of NZ$10,000,000. Beyond that level OIO approval is required and is also required for some rural and waterfront property acquisitions.
Overseas investors are strongly encouraged to obtain independent legal advice relating to their proposed investment in New Zealand to ensure compliance with the Overseas Investment Act.
GST
Goods and Services Tax (GST) imposes a transactional tax of 15% on virtually all transactions. There are few exemptions with these being principally in the financial services mortgage and loan sector.
GST is an end user tax and is not normally payable in respect of residential property. With other types of property the GST paid as part of the purchase price of the land can normally be reclaimed from the Inland Revenue Department if the purchaser is registered for GST. Accordingly there should be is little fiscal effect on the purchase, except for potential timing differences in cash flow.
Earthquake Due Diligence
The recent September 2010 and February 2011 Canterbury earthquakes have resulted in significant changes to building insurance in some areas of New Zealand. This applies to residential and commercial / industrial / retail properties. Premiums for older buildings in particular are expected to rise significantly, with the worst affected being virtually uninsurable. This does create opportunities for investors to buy or develop premium properties that are preferred by insurers and tenants / lessee and / or are in non-affected areas. Prospective investors are strongly advised to consider earthquake issues, including insurability, as part of due diligence.
Local Knowledge
It is important to tap into local knowledge about the best areas to invest and potential issues to consider. An experienced, professional local agent working for you can potentially save a lot of time and help avoid costly mistakes, as well as presenting opportunities that are best suited to your needs. Please contact us for an obligation-free discussion. There are also many useful resources and links on this website that can help with your preliminary research.
Australians Investing in New Zealand
Global commodity boom driving farmland bids
In a world where global investors are all looking for safe havens for their money, they see New Zealand farmland as good buying…Bloomberg reports that international investors, including billionaire George Soros and the Harvard University Endowment Fund are investing heavily in farmland in the US, parts of Europe, Latin America, Africa, and Australia. There has been offshore interest in New Zealand farms, including vineyards, kiwifruit and avocado orchards…Remarkably – and this would have sparked Fay’s interest – New Zealand farmland prices have been falling in spite of record export dairy and other commodity prices. While these have cooled lately, few economists are expecting prices to plummet.
Rabobank, in a report to a Washington conference a few days ago, predicted agricultural prices would shift higher and become more volatile, saying that any rolling back of biofuels legislation could add to the stresses. It said this would pose increasing problems for governments with their populations forced to cope with higher prices. Official figures, due to be announced soon will show the global population has soared to 9 billion, and climate change could add to food production problems in many countries.
Check out the NZ dairy farm equity investment opportunity – NZ$500,000 – projected 9%p.a. return
Freehold Land Titles – 6.0% p.a. NET; from just NZ$32,500 per title! SECURE, Guaranteed long-term return.
Following are latest New Zealand property investment opportunities – all with very good balance of cash flow and capital growth potential.
Freehold Land Titles – SECURE, Guaranteed long-term return 6.0% p.a. NET
…from just $32,500 per title!
This is prime waterfront land in recent Napier development. You own the freehold land under a modern apartment, and the apartment owner (the lessee) pays you an annual lease fee. There is significant upside potential and provision to retain the lessees unit in the highly unlikely event of default. Great thing is you have no outgoings to pay and you don’t have to worry about tenants or maintenance. What could be better!
This investment would suit long-term investors requiring a solid cash-flow, with the security of freehold land and potential for capital growth.
Please contact me urgently if you would like further information as there are only a few titles left.
Dairy Farm Equity Investment -parcels from $50,000 -9% projected return.
Expressions of interest are invited, from suitably qualified investors, for investment parcels of $500,000 (with $50,000 increments) or parcels of $50,000 (with $10,000 increments) in this established, fully managed, Murchison (West Coast, New Zealand) dairy farm. Projected average pre-tax returns on capital invested of 9.0% (for first 3 yrs, based upon a Fonterra pay-out of $6.50).
Further information, including Information Memorandum, is available on this link.
Wellington (Whitby) – NEW Home + Land Opportunity. 10% Deposit with Balance in approx. 12-18 months. Projected 7% Gross Yield.
Whitby has been experiencing 5.3% average Capital Growth for the past 10 years. The Camerosa 2 bedroom plus 2 bedroom semi attached Strawberry Home is individually titled with freehold land. You can purchase them individually at the listed price (from $335,000) or 2 together for $640,000 ($320,000 each). Projected rental income of $425 per week, totaling $850 per week on a $640,000 purchase, rates approx. $2,000 each.
2 bedroom homes are highly sought after by 1st home buyers, retirees looking to downsize, investors and solo parents. Secure off the plans with a 10% cash deposit or bank bond cost about $2,000. Expected completion date 12 to 18 months.
Contact us for further information
HASTINGS – New Commercial Building $1M parcel, 9% Projected cash return
The amount of the investment is $1M, with $150,000 payable on application and the balance of $850,000 in 2012. This is a brand new building, due to complete in 2012, already leased to outstanding “household name” tenant.
WHANGAPAROA – AUCKLAND ($2M) – High Profile location / outstanding site. $2.2M
This property comprises a superbly positioned Mobil Oil New Zealand Limited facility on 72 Red Beach Road, Whangaparaoa which is situated in the Red Beach Road shopping precinct. The property is a large site and has significant frontage to Red Beach Road. On the wide frontage is a Mobil Service Station complex which is leased to Mobil Oil New Zealand Ltd.
The property is a freehold site with a total area of 2,000m². The lease to Mobil Oil is currently a rental of $160,000pa+ GST with the lease term expiring 31st August 2022. Contact us for further information.
Jim Rogers Is Bullish On All Commodities…”…thinking of buying agriculture maybe this afternoon”
Jim Rogers Is Bullish On All Commodities, But There’s Only One Sector He Would Buy Right Now. He says that agriculture ” … faces scarcity even in a recession.”
Interesting comments about “much much higher prices over the next decade ” and urging investors to “buy now”
Check out this current opportunity to purchase equity in a New Zealand dairy farm with projected average pre-tax returns on capital invested of 9.0% and some outstanding upside potential…investment parcels of NZ$500,000. Contact us for further information.
New Zealand Property & Business 