Many of our clients we talk to today have a common set of questions which relate to the commercial property market.
1. What is happening to the value of our property - is it going down?
2. How high are the interest rates going to go?
3. Are commercial buildings still leasing and selling?
4. Are businesses still holding their value?
To answer these questions, we need to address each section separately.
The value of commercial property has primarily always been based on the return it can give to the owner, this has not changed. What may have changed is the cost the landlord has to pay if they owe money to a bank or other lender. This cost could have increased, which in turn equates to a lower return on investment. Where we are seeing a market change is in the cap rate purchasers are prepared to pay when buying commercial investments. This has moved up from the 5% range into the 6% range. In saying this good property with sound tenants on long leases are still fetching good sale prices.
Interest rates have always fluctuated. The last 10 years of low interest rates is not the normal situation in NZ. Who really knows where the rate is going to ascend to? The older people can remember interest rates close to 20%. The equity required when borrowing was always above 60% meaning the banks would only lend 40%. Many of the older investors have kept their equity high as an insulation against the rising cost of borrowing. We know the interest rates will fall again; we just don’t know when.
Commercial buildings are still selling, just not the numbers that we have seen over the last few years. If the property has good long-term tenants with a proven track record, they will still attract serious investors. Serious investors take a long term view and can see the sunrise and don’t mind lower returns for the short term as they know things will get better.
Commercial lease activity has increased in the Whangarei area. A lot of this is around new business moving into town as the district grows. Rental rates are also holding up and actually increasing in the industrial properties. Demand is still out-stripping supply in both the Whangarei and Ruakaka areas.
Business profits are shifting a bit with the cost of labour and the cost of finance affecting the bottom line. While this affects profitability it does not crash the sales value of the asset. The multiples for the sales value remain unchanged which in turn might see a slight reduction in the business value but nothing catastrophic is happening in this sector.
In conclusion there has never been a better time to buy a business or enter into the property market. History proves that these financial times can yield great investments in both the business sales and property investment markets.