Commercial Property Investment - What You Need to Consider

The question amongst many prospective home buyers and investors in New Zealand, is whether to invest in residential or commercial property. As regulations for residential property owners have increased, commercial property is looking more worthwhile.

With the boom of the new build, ‘kiwi-build’ homes across the residential market, buyers are required to put down, on average a 20% deposit, must hold on to the property for 5 years to avoid paying capital gains tax and are fully responsible for the rates, insurance, and body corporate fees.

Typically, when purchasing a commercial property, the return on investment is higher compared to residential properties.

There are several key factors to take into consideration however, when investing in commercial property.

Commercial property prices are higher
The price of a commercial property is usually of a significant figure. The bank can generally lend up to 60% to 65% of the purchase price, however the asking deposit of 35% to 40% for commercial property will still be a large sum of money, and larger than a deposit for a residential property. Banks can also lend on average 80% deposits for residential property.

Commercial property loans are shorter
It may seem like a long-term investment, but commercial property loans are typically shorter term, lasting 10 to 15 years, as opposed to residential loans which can last over 30 years.

Renting can be a bit more complicated
If you plan to rent your commercial property, it’s not as simple as passing a healthy homes equivalent assessment. Requirements include carrying out a seismic assessment to ensure the property is earthquake safe, and according to the New Building Standard, it needs to meet at least 67% of the criteria to be deemed suitable for tenants. Landlords need to be aware of formidable costs which can arise such as re-fits between tenants. All these combined are a significant cost commitment.

It can be harder to face an economic downturn
When business is struggling due to a slump in the economy or a pandemic, commercial property, often hosts of local businesses, are at a higher risk of failure. Exposed to the market conditions, and lack of income, it can be riskier to invest in a commercial property where debt payments are reliant on business cashflow.

It is recommended for anyone considering investing in commercial property to have considerable savings, and reliable, consistent income. Cash buffers and contingency plans should be in place, so any investor can confidently and reliably enter commercial property investment with ease and come away with a successful investment. The helpful NAI Harcourts team across New Zealand will be able to guide you every step of the way.