KEY POINTS:
I have always preferred commercial property to residential property. Commercial property (warehouses, offices and shops) is higher yielding, easier to manage, works on long-term leases and has less maintenance. However, it takes a lot of money - anything good will be over seven figures, maybe eight.
And you are likely to be reliant on a very small number of tenants for your income. So, how do investors who do not have millions of dollars get into commercial property? The answer is real estate investment trusts (REITs) - often called listed property trusts.
REITs are big commercial property investors which are listed on the share markets (you buy their units through a sharebroker). Typically, they own dozens of properties worth hundreds of millions of dollars and have funded the purchases of these mostly by taking investors' funds but also with little borrowing. Most focus on a particular type of property: for example, Property For Industry owns industrial buildings; AMP Office Trusts owns offices; Westfield owns retail property.
The portfolios that most REITs own are very good quality - the properties are well located and the building often near-new; the leases are long and the tenants usually top class (big corporates and Government-type tenants). This means income is secure; the good locations mean a good rate of capital and income growth.
Most REITs have done very well over the past few years and although commercial property does not look so good at the moment, it is hard to imagine that commercial property will not continue to perform.
A new PIE regime means that tax is capped at 30 per cent and that depreciation benefits are effectively passed through to investors.
Most REITs pay all of their profits to investors. This means they are high yielding - because of the PIE regime many REITs give an effective gross yield (before tax) of over 10 per cent and some as high as 13 per cent (assuming that you are on the 39 per cent tax rate).
The downside is the management fees (the contract to manage the trust is usually long term and of considerable value to the manager). Some also start to "land bank" and get into development, which I do not want.
Nevertheless, REITs let you buy into a portfolio of top-class properties. Each week financial author Martin Hawes will share his strategies to help you grow your wealth. Email questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz On the web: www.wealthcoaches.net
Congratulations to: Greg Lumsden, Orewa; Selwyn Lawrence, Sandringham; Paresh Dayja, Manukau: Sarah Edmonds, Franklin; Lee-Ann Trebilco, Morrinsville; Jacqui Wren-Hilton. Your copies of Family Trusts - A New Zealand Guide by Martin Hawes are in the mail.
