The property is located at the basement of a hotel building in Auckland CBD. When I first looked at it in November, 2008, I thought it would be very difficult to lease out as a retail unit. Why?

The property is located well below street level and behind the building, making it invisible from the street. You just cannot expect pedestrians to wander into the store. Worse still, the property has an irregular shape and a concrete block in the middle of the store. Also, the ceiling is low and there’s little natural light.

Yet, the asking rent of this 123-sqm retail property was high at $325/sqm, when better properties were available at between $200 to $250/sqm. Naturally, the property has been vacant since then. Last week it was advertised again but the asking rent has not changed. No wonder they could not find any tenant.

For an investment property like this one, I don’t think it’ll work unless the price is so low that I can offer an exceptionally low rent to appeal to a very small pool of prospective tenants.

mr fudo
commercial property investment

This deal came to me recently. It’s a commercial unit inside an apartment building in Auckland CBD. The tenant is a gym operator. Net income from the property is $75,300 and the asking price is $750,000, giving this investment a cap rate of slightly more than 10%. Yet, this property does not appeal to me. Why?

Actually, this property has been on the market for over 2 years. I inspected it back in 2008 but decided not to proceed any further. Here are my reasons.

First, the property is located on the 4th floor and the building requires use of security code to enter. This means the property cannot benefit from any foot traffic outside the building. Also, I never like gym operators as tenants as they can go broke easily during economic downturn. In the current environment, a solid tenancy is critical. Finally, the property is leasehold so you must pay rent to the land owner, meaning you have no control of the ground rent expense.

Like what Warren Buffett always says (”We applaud the endeavor but prefer to skip the ride.”), I’ll have to pass up this commercial property investment opportunity

mr fudo
commercial property investment

It’s fun looking at photos in commercial lease ads, but it is also very profitable. Let me explain.

The basis of valuing an investment property is its market rent, and the quickest and cheapest way to understand market rents is by studying commercial lease ads. Unfortunately, many commercial lease ads do not include property addresses. Luckily, most ads include photos of properties and many commercial agents tend to use the same set of photos again and again.

This is how I take advantage of this little fact. Everyday I check ads of commercial properties in Auckland CBD. If I can identify a property, I store its details in a database, and then save the ad in a PDF file together with its accompanying photos.

When I see a new ad containing familiar photos, I can compare them with the property photos stored on my PC. For example, recently I came across a commercial lease ad where one of its photos shows a retail store with “Viva Couture” on its shop window. This photo is unique and so I always remember it. Checking it against my collection of property photos, I found out the same photo was first used in 2008. I also got the address of the property. The property’s record in my database tells me this property has been vacant for over 2 years, and the asking rent may be too high for the current market.

By doing this exercise across a variety of properties in Auckland CBD, I can also access the state of the commercial lease market in this area.

mr fudo
commercial property investment

I recently attended a commercial property auction by CBRE at their new office of 21 Queen Street. Five properties were auctioned but only one was sold under the hammer. The sold property is tenanted by travel agency Flight Centre giving a cap rate of 6.65%.

The whole auction took just 40 minutes, even including a charity auction of two bottles of wine. This indicates the lack of buyer interest in this bear market. About 30 potential buyers attended the auction, but the majority of them were Chinese immigrants. I even talked to an old Chinese lady in her 70s or 80s! This suggests Chinese immigrants have cash and are willing to buy low cap but must be tenanted properties. On the contrary, local buyers may have difficulty borrowing to invest. This explains why vacant properties even in prime locations attract little interest.

Interestingly, CBRE is still the only office tenant in the whole building at 21 Queen Street. All other office floors are still vacant. Overall, I think the commercial property market is still going through its slump phrase.

mr fudo
commercial property investment

Google Maps is very handy when you want to locate a commercial property.  For example, recently I saw a listing on TradeMe about an office for lease. Turner Street was given but no street number was included. Fortunately the ad also had a photo of the building.

This is how I found out the full address of the property. I opened Google Maps and then entered “Turner Street”. When a photo of the street appeared, I used the Up and Down keys to “walk” up and down the street until I saw a building that matched the photo in the ad. At this stage, Google Maps gave me a street number, 14, which is usually an approximate indication. Next, I entered the full address “14 Turner Street” and then checked the Address Marker. I repeated this process with other neighboring addresses until the Address Marker landed in front of the desired building, which in this case is “16 Turner Street.”

So, Google Maps saves me time and helps me to obtain the full addresses of commercial properties.

mr fudo
commercial property investment

I’d like to see our version of Golden Mile on Queen Street as well.

According to National Portfolio, Bob Jones is supporting the Vibrant Wellington campaign to turn the Golden Mile (Lambton Quay St) in Wellington into a pedestrian only street filled with cafes and shops. If the campaign succeeds, buses will be replaced by light trams and bicycles, and shops will be serviced from the rear of the buildings.

Well, our lower Queen Street has the same potential too. It’s flat with wide sidewalks, and features top retails stores and cafes already. You can simply landscape the street with trees and shrubs, and then add public space, street furniture, lighting, paving, art works etc. Once completed, it will attract diners, shoppers, and the general public to gather in this area, making our Golden Mile a very vibrant place to enjoy.

Will it happen? Possible. The shared space project of Fort Street may be a trigger to such development.  For this reason, we should watch the lower Queen Street for opportunities in commercial property investment.

mr fudo
commercial property investment

A smaller world will be good for commercial property investment in Auckland CBD.

That’s what I concluded after reading the book “Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization” by Jeff Rubin. In this book, Rubin talks about the fast coming peak oil and its impacts. He’s predicting oil going well above $200/barrel soon. (I remember well that oil price soared to $147 in 2008, crashed to $32, and is now already above $80.)

What will it mean? Simply put, the higher oil price goes, the more expensive distance becomes. Driving your car will be very costly. This will force people to live close to jobs, shops, and entertainment.  Here, Auckland CBD is the perfect place to capitalize on the problem. It provides apartments, jobs, shops, and a variety of entertainment — all within walking distance.

Long term, a growing resident and working population will drive up rents and values of commercial properties in Auckland CBD.

mr fudo
commercial property investment

Recently I mentioned ASB Bank’s rumored move to the Viaduct Exchange campus in Wynyard Quarter. It looks like the area is correct but the location will be different. According to the latest news, ASB has not chosen Viaduct Exchange but will be moving to the Jellicoe Street/Halsey Street corner.

Its 1,100 staff will take up most of the 18,000 sqm of space in the new building slated for completion in 2013. I think ASB will act as a catalyst to attract more people and revitalize this part of the waterfront. Eventually, Wynyard Quarter will have 14,000 workers and 7000 residents when the other commercial and residential projects are finished.

However, it still baffles me to understand why ASB will not join the other big three in the upcoming banking district of lower Queen Street/Britomart area. Why would it stay away from its major corporate clients?

In terms of investment, New Zealand Herald reported that it will cost the owner (a property trust) 9.75% in borrowing but the return will be much less. Even worse, the land will be leased land only. Therefore, I don’t see anything attractive in this deal. The only possibility may be for the trust managers to earn handsome management fees with the ultimate loss going to its small investors.

mr fudo
commercial property investment

Are they fantastic deals or fantasy deals?

Recently I came across two storage units for sale. They are both located in the carparking levels of office buildings in Auckland CBD. Both are corner spaces which are either too small or irregular in shape to be useful as carparks. But, developers are creative when it comes to turning every inch into dollars. So, two walls and a door later and you have a storage unit!

These properties were sold during the boom years when demand for office space was high. Therefore, despite the high prices, the new owners were happy by leasing the spaces as office units of 20 to 30 sqm.  The problems? The units have no ventilation, water, toilet, and kitchen facilities.

Now that recession is here, tenants have gone for better offices at cheaper prices. The storage units can only be leased for their original purpose — at much lower rents. These deals are only fantasy deals. To be attractive as property investment, their prices must come down by half to two-third of the original prices.

mr fudo
commercial property investment