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Which is better, Residential or Commercial Property Investment?

For many New Zealanders the goal of owning an investment property has been ingrained as one to aspire to. The reality can be quite different. Prices in Christchurch have been largely flat for last three years, sales volumes are falling and the engine room (Auckland) is running out of puff. The recent Loan to Value Ratio (LVR) restrictions put on by the Reserve Bank have seen landlords either being told to deleverage or that they cannot continue to build their property portfolio.

To quote Quotable Value “We’re currently looking at a nationwide downwards slide in sales volumes, a trend that started a year ago.


In Auckland, volumes are down 30% year on year, slightly less in Hamilton and Tauranga and less again as you move down South. But the slowdown in sales is definitely nationwide

I can hear the property investors start to say "Well what about net migration? With more people and a finite amount of land prices can only go one way?" Strong net migration is really only an Auckland story, looking at the table below net migration to Christchurch is falling year on year and in only one region does it get above four figures.

Core Logic recently stated “Record high net migration appears to have eased off in recent months. This is being driven by a small but gradual increase in departures and a recent drop in arrivals. After an extended period of net gain from Australia, this has swung back to zero and would appear to be once again heading to for a net loss of Kiwis across the Tasman”.


Next thing I often hear property investors say is that “Consents have not kept up with years of pent up demand”, this was true a year ago, unfortunately building consents have now overtaken population growth and are now at their highest level in 20 years. So with falling demand and rising supply, even someone with rudimentary knowledge of economics can guess what is going to happen next.

Don’t get me wrong I understand the attraction of residential property investment, I myself own my own home. Everyone needs a roof to live under and whilst a mortgage can last 30 years, rent goes on forever. As a form of shelter residential property makes sense, as an investment it is a terrible waste of money. So let’s look at the investment case, what is the return on residential property investment in our largest centres?

Data from QV, AKA, Core Logic.


In Christchurch, you can see the average gross (before tax) yield is currently 4.52% and prices have increased 1.79% for the year. For a 33% tax payer that’s a net cash yield of just above 3%, ouch. Not to mention the 1.35% per annum on average to pay for rates, insurance, maintenance; all for the pleasure of being able to spend your weekends fixing the oven or mowing the lawns. Heaven forbid you didn’t have tenant for a month or two, then there would be no return at all.  You don’t do the gardening, or the letting? There goes another 12.5% of your income for a property manager. You get my point, fundamentally things are looking pretty stretched, and to be honest residential property has had a great run over the last decade. So if not for residential property where can you put your money? For some, the share market can be a scary place, fortunately there are some relatively simple investments on offer.

If you like the concept of property why not look at listed commercial property. The listed property sector purchase investments which a Trust or Company then manages like a property manager. Listed property invest in a diverse range of properties including, commercial, industrial, retail and medical. Think the Vero building on the Auckland skyline or Sylvia Park Mall, to name a couple. (Both buildings mentioned are owned by Kiwi Property Group Ltd. Ticker KPG).

We like Listed Property for the following reasons: 

Liquidity – Can be bought and sold easily and cheaply compared to non-listed property.  

Diversification – Spreading your money over many high quality commercial buildings. 

Attractive gross dividend yields in the range of 6-8% p.a. 

Quality. The Trusts & Companies own properties which have quality tenants. 

Below are a couple of options to get your money working a bit harder & smarter.

Goodman Property Trust.

Goodman Property Trust is an externally managed unit trust, listed on the NZX. It has a market capitalisation of $1.6 billion, ranking it in the top 20 of all listed investment vehicles. Goodman Property Trust is New Zealand’s leading industrial and business space provider. It has a substantial property portfolio with a value in excess of $2.1 billion that accommodates more than 250 customers. The Trust holds an investment grade credit rating of BBB from Standard & Poor’s.

Share Price: $1.24 per share

NTA: $1.305

P/E: 7.41

Dividend Yield: 6.6% (Partially imputed, tax paid)

Argosy Property Trust.

As one of New Zealand’s leading listed property companies, Argosy own a diversified portfolio of industrial, office and retail properties predominately in Auckland and Wellington, with a modest tenant-driven exposure to other parts of New Zealand.
Argosy’s tenants span a wide variety of industries. Listed on the New Zealand Stock Exchange under the ticker code ARG. With more than 9,000 shareholders, and a market capitalisation of $860 million.

Share Price $1.045

NTA: $1.065

P/E Ratio: 8.18

Dividend Yield: 7.39% (Partially imputed, tax paid).

 

Finally, property investors often say to me they prefer residential property over shares because of the leverage, well guess what, the listed commercial property companies are modestly leveraged themselves (usually in the 30-40% range, i.e. 60-70% equity), allowing you to benefit in the same way without taking the same level of risk.

Higher yields, less work, higher quality tenants and buildings, lower transaction costs and more liquidity, perhaps it’s time to consider the listed property sector over residential.

 

 

This article was written by Jeremy Sullivan – Authorised Financial Adviser at Hamilton Hindin Greene Ltd. The article represents general information and does not constitute personalised financial advice. If you would like to know if the investments mentioned are suitable for you please contact your investment adviser. A secondary disclosure statement is available free of charge by going to www.hhg.co.nz or by calling 0800 10 40 50.

 

 

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