Conversations with Mike Neale of NAI Harcourts Hamilton
Should I sell my commercial property – Or is there a better way?
There have been some interesting discussions over the last month or so with commercial property owners looking to make decisions – should I sell up and put the money in the bank, enjoy life and remove any stress that the property may provide in the future? Most are close to or at retirement age and whilst not needing the money for anything in particular, are looking for a passive income and not wanting to leave the family with future issues that a commercial building may have.
This is an actual example from a discussion we had with an owner about a fortnight ago.
Building: Returning circa $65,000pa plus GST and Outgoings
Building Age: 1990s
Sale Value: circa $1,100,000 plus GST (if any)
They have owned the building for over 20 years and it’s now freehold with no debt.
The reason they are considering selling is that recently there have been a few dramas over Covid-19 and while a reliable local tenant is in place, there are now challenges with the rental being paid.
If they were to sell and put the money in the bank at a return of say 1.50 percent, it would provide a return of $16,500 per annum before tax.
The Better Solution?
May well be to retain the property and get it professionally managed. Why and how would this work?
- Based on the current net rental it currently provides a return of 5.9 percent.
- Even at the current 50 percent rental being paid, it provides a net return of 2.95 percent.
- In many cases the ADLS Lease provides for the landlord to recover the cost of the property management from the tenant.
Even if management expenses are not recoverable (at say 6 percent), the above returns would still be 5.55 percent or 2.77 percent respectively. This is significantly better than the returns in the bank.
Another Important Element To Consider?
There is no capital gain on the money held by your bank – in fact, allowing for inflation, it is quite the opposite. As an example, this particular property has doubled in value over the last 15 years.
There is increasing talk by pundits that with the quantitative easing programme and very low interest rate environment, we are likely to experience asset price inflation over the next few years, i.e. the value of the assets, will increase as we see increasing competition for income-producing assets, due to the alternative of low returns from bank deposits.
So, if you are selling because you don’t want the management hassle and compliance issues, or worried about leaving it to family members in the future, then this may just be worth consideration.
If you don’t need the capital for anything in particular, but prefer or would be happy to maintain the cashflow, this is definitely worth serious consideration.
Yes, buildings will require future capital expenditure and even allowing for the occasional vacancy, the combination of the returns and future capital gains, make property a compelling investment both now and in the future. As one of my colleagues once said, “only in Holland are they making more land”- you can guess where he originates from.
All assets have some element of risk associated with them – some will remember the Bank of New Zealand being bailed out in 1989/1990 and the share market crash of 1987 – and real estate is no different, but it is an investment in something tangible – bricks and mortar.
I will at this stage give a plug for Greg Wills who heads our NAI Harcourts Property Management division (there are others out there too). Greg has previously managed one of Hamilton’s most challenging assets – Centre Place shopping mall. This experience has left him with not only the technical skills and facilities management experience, but the ability to deal with a wide range of tenants and the various personalities that are often the most challenging aspect of property management in my view. He would be happy to talk to anyone considering their options – so on a no obligation basis, give him a call on 021 896 585.
