9
MAKING GOOD
COMMERCIAL
SENSE
Conditions favourable at present
“The rental is determined by the lease. It
is important that it is based on fair market
comparables. Return is based on people’s
opinion – return is the thing that’s subjec-
tive, being determined by a number of
factors. Return rises with higher risk and is
lower with more growth.”
For example:
•
$11,000 per annum rental at a
10% return values the property at
$100,000.
•
$11,000 per annum rental at an
8% return values the property at
$137,500.
“An example of lower return with more
growth is downtown the Mount. There, a
5-5.5% return turns one dollar of income
into $20 of value. As the yield goes down
it multiplies the rental over time.”
As with property in general, the
overriding key aspect is
location, location, location, says Simon.
“Buy the best profile or easily accessed
site with good roading. There might be a
rarity value, such as the Mount, or even the
Tauranga CBD, because no land is avail-
able. In Tauriko and Papamoa there is lots
of choice.”
The second key aspect is the quality of
the building: its size, layout, specialisation,
car parking, access, stud height and earth-
quake rating. “All buildings become vacant
over time. It’s the location and quality of
the tenant that will protect you.”
Specialised buildings such as a child-
care facility could potentially backfire, he
warns. If the tenant leaves, the building
has limited other uses. Equally, office and
retail buildings have got to have
good car parking.
The third key aspect is the lease: its
length, the strength of the tenant (“We
need to do more vetting of tenants”), rental
growth, rentals, ratchet clauses, OPEX and
reinstatement.
“If the market does change, you’ve really
just got to meet it or the tenant will move
out.”
Simon rates Tauranga for investment
because of its high population growth, the
very limited land supply, its great roading
infrastructure and its solid base.
“Tauranga is a place where people come
with money. There is good equity in our
properties. Pre GFC [global financial
crisis], good-quality Tauranga properties
were yielding 6%. The return is
By Paul Dykes
