There is no doubt that New Zealanders love residential property as an investment.  The reasons why are easy to note: property is a tangible, easily understood investment – you can see it, touch it, manage it yourself (if you choose).  It generates cash via rent, offers some tax advantages, and generally speaking capital gains have been stellar over the last 20 years, although the market has been flat at best in Auckland for the last 3 years.  

Partly this love of property also dates back to the NZ share market surge and subsequent world-worst crash in the late 1980s.  Many people over 50 today were burnt badly, and have avoided shares ever since.

But for investors looking for exposure to property, commercial property may be a better option – particularly by investing in listed commercial property companies that each own a significant portfolio of commercial properties.  In New Zealand, this is through companies such as Kiwi Property Group, Goodman Property Trust, Precinct Properties, Stride Group, etc. 

The advantages of listed commercial property compared with residential property are:

  • Part ownership.  Rather than buying an entire residential property, investors can enjoy part ownership by buying shares in the listed property company.
  • Liquidity.  Similar to above, investors can sell some or all of their listed commercial property investment on the NZ share market.  Much quicker and easier than selling a house.
  • Yield.  Commercial property typically generates a higher income yield (rental income as a percentage of purchase price) than residential property.  In a market like Auckland, where residential yields can be below 3%, the difference can be significant – commercial property yields above 6% are common.
  • Costs.  Costs are usually lower for commercial property v residential property.  This includes the cost of property management.
  • Diversification.  Listed commercial property companies own a number of properties, often in different geographical areas and sometimes across different segments of the commercial property market – industrial, office and retail.

Overall, property of any description is an excellent growth investment which has the added advantage of generating strong cash flows.  It often performs well when equity markets are in retreat or when interest rates are low, and helps to reduce overall portfolio volatility.  But investors should consider commercial property as an alternative to residential property due to its easier accessibility and superior liquidity.

 

Dean Edwards

 

Property investment: residential or commercial?

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