Tony Brazier

www.braziers.co.nz

Tony Brazier

The Press - Wednesday 26 August 2009

Commercial vs Residential

The age old battle as to which form of property investment is better is still raging strongly, especially within the fields of real estate practice and property investor associations.

If the truth be known, and elements like equity, interest rates and tenant security weren’t an issue, then the answer is an easy one. Commercial (and I’ll include industrial in this) would be the logical choice for all as in this form of investment one generally only has to be concerned that the tenant is kept “water proof” in your building. This is why investment advisors, who generally do most of their investing from their desks, will guide their clients into this form of property.

Commercial property comes in all shapes and sizes but most (69%) falls within the $1M dollar sales bracket and has only a few tenancies, often run by the owners themselves. Management of this size of commercial property is generally much easier, the tenants longer leasing and the costs minimal, compared with the equivalent sized residential. Larger commercial buildings of several floors, with many tenants and with lifts etc are a full time job for one manager who needs to be tertiary qualified. In all cases knowledge of contract law and leases is imperative as a commercial property owner.

Those who have the ability to own commercial property swear by it, but there’s the rub, the ability to own. Commercial requires much greater equity of up to 50% in order to purchase, knowledge on what is an enforceable lease and the ability to convince a bank that you can handle a vacancy for extended periods. This is especially true right now. If you have this capacity, the present market will be presenting some good opportunities as this current recession continues to bite.

Residential and commercial don’t always follow the same property cycles at the same time. Presently commercial is suffering but has been reasonable for many years. It is reliant on economic and business confidence, exchange rates, manufacturing and the business owners’ ability to pay rent through secure leases. It is also exposed to whims of the large corporates and governments who with the stroke of a pen can create huge demand for space and/or supply e.g. banks closing branches or public service belt tightening. It is also heavily reliant on the prowess of the tenant and their ability to pay.

Conversely, residential property relies on demographics, immigration swings, interest rates and housing supply created in a timely fashion. Presently residential is looking a little rosier due to under supply of houses by developers, lowish interest rates, and increasing nett migration, however it still has its limitations with banks being tougher on the lending criteria.

As a form of investment residential requires much more ‘hands on’, either by the owner or a manager, than commercial and it is more important, now more than ever before, to know the legislation. Add to this the fact that the owner is responsible for all of the outgoings like rates, insurance and maintenance and it is easy to see why some make the transition to commercial when they can.

Having said this, the attraction of residential is generally in its ability to handle tenant downtime. Most investors know that by tweaking the rent a tenant will be found eventually whereas the commercial tenant needs to be attracted by uncontrollables like traffic flows, street exposure, neighbouring businesses etc.

Generally commercial investors wouldn’t thank you for the extra work involved in residential and residential investors don’t like the extra risk that comes with tenant downtime in commercial. However as time has gone by both forms of investment property have created interesting ‘grey’ areas that give the best of both worlds to their investors. Commercial sized, residential based enterprises like Wigram Lodge etc would tax the pockets of most commercial investors yet are run as a residential service provider to the surrounding area. Conversely the serviced business suites providing commercial space and services to a multitude of small business operators retains the security of numbers as opposed to having all financial eggs in a few tenant baskets. Many developments of older style ‘heritage’ buildings end up with this lower risk, higher management type scenario, usually one or more floors up from their street frontage.

The attributes of the entrepreneurial types to create the best of both worlds has given the average investor more options to purchase. One no longer needs to choose between residential and commercial as an emphasis for one’s investing. With care to weigh up the total portfolio on ‘risk versus return’ an investor can balance one type of property with the other. A higher yielding, higher management residential style property will balance the newer, low yielding commercial building with just one tenant that seldom requires a visit.

As time has evolved there are less ‘one-eyed’ investors in both camps as they awaken to the benefits of the alternatives.