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Which investment strategy is the best?

Commercial

Property Brokers 22 Apr 2021

Blog-image_Ulf-FuhrerResidential property investors have been fielding a plethora of changes, particularly; with the extension of the bright-line test increasing to 10-years and the unexpected removal of mortgage interest deductibility.

The prediction certainly seems to be that there will be an exiting of residential property investors, who supply over 80% of all rental properties to the market. Using the government's favourite terminology, this will now be "the new norm", and all that is left is for investors to "pivot" to the next opportunity.

"I previously pointed out the benefits of investing in commercial property instead of residential, and would now like to talk a little about the differences between commercial property in large cities versus provincial towns," says Ulf Führer, Property Brokers Commercial Sales Consultant.

One of the significant advantages of provincial towns is the yields (which measure property value and returns for the investor). This is why anyone invests, and the yields are significantly higher. For example, city investments may be returning in the area of 3-5% versus your typical provincial town, which is around 7-15% plus, depending on the infrastructure currently going on around it.

City councils are slow to react and find it easier to say no to growth than yes. Provincial councils are much smaller and tend to be forward-facing to development and growth projects, because, at the end of the day, this all adds to the councils' coffers.

What is prevalent is the greater focus on the development of business parks outside city centres. This has been commonplace in the likes of the United Kingdom for a long time, and, which I have seen in action firsthand, from spending many years on the ground, these become a thriving hub of business activity and a nucleus of shared ideas.

Areas to keep an eye on for potential investment are business parks such as:
Waharoa - Industrial Park, Tauranga – Tauriko Business Estate, New Plymouth – Bell Block Industrial, Napier – Irongate, Palmerston North – Freight Hub and Ring Road redevelopment, Ashburton – Ashburton Business Park, Oamaru – North Oamaru Business Park. These will become our business and production powerhouses of the future.
Covid has been a lightbulb moment for many businesses in large metropolitan areas. Particularly manufacturing and distribution businesses, where the large population base creates more headaches than it solves.

 

Over the last 12-months, cities have been almost held ransom due to community transmission of the Covid-19 virus.

The true financial cost of this may never truly be known, but what is known is that companies are now more receptive to employees working from home or other locations, rather than in large office blocks in the middle of the city. The result is a slow but steady reduction in the requirement of large office floors and, as with all things, the inevitable impact of supply and demand. As the demand reduces, so do the square metre rates in these buildings and the building's overall value as a whole.

Yes, of course, there is the possibility that eventually Covid will be gone from our lives. However, this does not change the infrastructure issues that large cities had before Covid. Woes such as traffic, a worsening housing affordability issue, and the lack of rental stock are likely to worsen with employees not tending to want to travel two hours each way to work due to not being able to afford to live in the city in which they work.

We know 80% of all New Zealand businesses are SME's. Many of these are based outside of city centres; cities are not self-sustaining - they require the products, services and manpower from provincial New Zealand to exist and survive. The majority of the countries' GDP comes from outside the main city centres, which is unlikely to change in my lifetime.

So, isn't it simple? To use a fishing analogy, fish where the fish are, or at least where 80% of them are!

Fish where the fish are in provincial New Zealand, and whatever you do - sell high, buy low, and talk to the man in the know!


PB Business

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