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March 8th, 2010
10% cap rate, solid building, Queen Street address What an attractive property investment?
The 400-sqm office was generating NZ$107,000 last July when it was offered for sale at $1m. With mortgage rates at less than 8%, the 2% spread would give you a decent income. Right? The fact is, the tenant was going to leave within a year.
Fast forward 7 months. The property is now advertised for lease and for sale as well. The new income will be $59,000 at best, and the price has dropped to $890,000. If you had bought the property last year, your new cap rate would have been 5.9% only. With $20,000 outgoings to pay while waiting for the next tenant, this deal is not attractive any more.
So, how can we better assess the value of a commercial property? My solution is to study the market and the rents. Choose a small area (Auckland CBD in my case), collect as much property information as you can regularly, and then store the information in a database.
After a while, you’ll start to understand the market as well as individual rental changes. When you have both historical and current rent data, determining a realistic rent and so the value of a commercial property becomes much easier.
mr fudo
commercial property investment
Posted in Property | No Comments »
March 1st, 2010
Auckland CBD office vacancy has jumped to 13%. The speed is impressive, because in July last year it was still standing at 7.7%.
The new forecast puts the peak at 20% in 2013. Will it break the record of 33% set in 1992? I won’t be surprised because the fundamentals are very negative.
The economy is weak, with unemployment already high at 7.3%. Also, the chronic current account deficit still continues and the fiscal deficit is growing rapidly. Yet, new office buildings are still being constructed — such as Telecom Headquarters and Westpac Bank developments. Supply and demand just do not match, so I think the vacancy problem still has a long way to go.
Funny though, office properties in the sub $1m market are not cheap. Even vacant offices are selling at about 10% cap rate based on rents of last boom. So, I don’t find offices attractive yet for commercial property investment.
mr fudo
commercial property investment
Posted in Market Analysis, Property | No Comments »
February 15th, 2010
For those who want to lease an office unit in Auckland CBD now, time has never been better.
Just look at this ad I picked up recently. The office building is Krukziener House at 17 Albert Street. The rent is only 188/sqm for 160sqm of space. Compared with those in the high 200/sqm I saw early last year, this one is really cheap. Wait! The rent is actually gross rent, which is the first time I have come across in this building.
There’s more. The ad reads: “Incentive rental package for suitable tenant including rent free, landlord contribution to fittings etc Just present your best offer!”
I just can’t believe it. This cheap rent will go further down for sure! For those owning commercial property investment on large debts, time is really tough.
mr fudo
commercial property investment
Posted in Market Analysis, Property | 2 Comments »
February 8th, 2010
The way I see it, Chancery Square is still struggling. This premier shopping area still have very high vacancy at 26%. When I last counted recently, there were 11 vacant shops out of a total of 42.
Those along Courthouse Lane are hit hardest by the economic downturn. Half of the shops are empty or with frequent changes of tenants. I think poor foot traffic is the cause. Another problem street is Chancery Street. It’s always quiet and very seldom do I see shoppers walking on this street. Some shops inside the square are obviously on short term leases. I can tell because they don’t even put up a shop name. At least one shop is selling discounted major fashion labels.
Some of the retail properties are also for sale as vacant shops. If you want to buy them for commercial property investment, make sure you have done your homework on two issues: (1) difficulty in recruiting tenants, and (2) cost in fixing the leaky buildings in Chancery Square.
mr fudo
commercial property investment
Posted in Property | No Comments »
February 1st, 2010
It’s tough trying to work out the rent or purchase price of an investment property if the quoted floor size is inaccurate. This is particularly important if the property is vacant or when you want to compare properties.
Unfortunately, this problem is very common. For example, look at the retail shop at 30 Queen Street in Auckland CBD. Because of its top location, the rent is very expensive. However, its high quality does not guarantee accurate information. In this past year, I’ve seen four ads on this property, and they all quoted different sizes: 218 sqm, 255 sqm, 261 sqm, and 267 sqm.
To tackle this problem, I constantly store Auckland CBD property information in my database, and just use the smallest size in calculation of the property. A bonus of this approach is that I have actual rent history to help me set a market rent for a vacant property.
mr fudo
commercial property investment
Posted in Property | No Comments »
January 25th, 2010
The focus of Auckland CBD, particularly office buildings, used to be north-south along Queen Street. Now, the center has been shifting to east-west along Quay Street. Just look at the number of office buildings completed in the last few years: Quay Park, Westpac, Vodafone, NZI Centre, etc. Furthermore, Viaduct Exchange, Westpac East, and Britomart Oriental Building are either under construction or on the planning table.
Developments of Queens Wharf, Britomart Precinct, Wynyard Quarter, and Victoria Market will complete the east-west shift, and the waterfront will become the place to work and shop. For commercial property investment, I’ll continue to watch closely developments in this area.
mr fudo
commercial property investment
Posted in Market Analysis, Property | No Comments »
January 18th, 2010
The center of Auckland CBD continues to shift to lower Queen Street and the waterfront.
This is evident in completion of new buildings such as NZI Centre, Deloitte Centre, and East Building. Also, developments in Wynyard Quarter, Queens Wharf, and Britomart Precinct are underway.
Another trend is consolidation of staff to corporate headquarters in Auckland CBD. Examples are Telecom, BNZ Bank, and Westpac Bank.
In city development, this year saw a number of streets designated as shared streets. The makeover will begin soon and will benefit retail shops on these streets.
Several buildings were found to be leaky: Princes Wharf complex, Chancery Square, and Fonterra Centre. Also, Chancery Square and The Metropolis failed to keep retail tenants, resulting in many vacant shops.
Retail vacancy is still low. However, office vacancy has soared to 11.5% and will continue to rise. Subleases and shared offices have increased too. Rents are dropping and lease incentives are common.
To conclude, despite rise in office vacancy, Auckland CBD continues to grow in its importance. The long-term prospect of commercial property investment in this area is very good.
mr fudo
commercial property investment
Posted in Market Analysis, Property | No Comments »
January 11th, 2010
Work on this new building has begun and is slated to complete in 2011. The 6-storey building will be located at the corner of Quay Street and Britomart Place next to the Countdown supermarket in Auckland CBD. The ground floor will be taken up by retail spaces and the rest for 1250 carparks. This is much simpler than the initial plan which included apartments and a cinema.
This will help attract people to work or shop in the Britomart area. People attending events at Vector Arena should particularly welcome the carparks. Although there is no retail tenant commitment before construction, I think this project should be fine as most of the space is for carparking anyway.
In terms of commercial property investment, I’m not too keen on this area because the properties are of leasehold nature.
mr fudo
commercial property investment
Posted in Property | No Comments »
January 4th, 2010
Auckland CBD office vacancy has jumped to 11.5% now. According to the December issue of Colliers Research Report, the office vacancy has increased significantly from 8.4% in June to 11.5% in December.
Interestingly, the worst figures come from premium grade and D grade buildings. With the premium grade, I think the problem lies in the oversupply. For example, the new office building at 21 Queen Street is still mostly vacant.
When I look at the change over this 6-month period, I must say the situation is deteriorating rapidly.
Grades / Jun 09 / Dec 09
Premium / 1.9% / 14.3%
A Grade / 6.4% / 10.4%
B Grade / 5.4% / 10.0%
C Grade / 10.8% / 11.5%
D Grade / 24.3% / 22.5%
Overall / 8.4% / 11.5%
This is a challenging time for commercial property investment. Only those with cash or strong balance sheet should go for vacant office properties.
mr fudo
commercial property investment
Posted in Market Analysis, Property | No Comments »
December 28th, 2009
A comparison of economic rents with market rents may tell you where the market is in the property cycle.
A recent CBRE ViewPoint article discusses how a comparison of economic rents with market rents can indicate where we are in the commercial property cycle. Economic rent is the minimum rent required to develop a new commercial building.
When economic rents are higher than market rents, tenants are not willing to pay more for new development of commercial buildings, thus indicating a slump. However, when economic rents are lower than market rents, tenants are competing for space and it becomes profitable to develop a new building, indicating a boom.
Looking at a chart on Auckland CBD office buildings, I can see the economic rents were lower than the market rents during the boom in 2007/08; now the economic rents are higher but the market rents are rapidly dropping, indicating we are entering a slump.
Of course, when it comes to investment, each commercial property must stand on its own merits.
mr fudo
commercial property investment
Posted in Market Analysis, Property | No Comments »
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