Traps for office block investors

By ANNE GIBSON

Auckland is the single most expensive place in which to be a commercial property investor.

That is what emerges from the Property Council's guide to the cost of fixed charges and operating expenses for office buildings.

But the good news is that rents are higher in Auckland, too.

The guide shows the rates bill on office buildings in the Queen City is much higher than elsewhere in New Zealand, even though Wellington insurance premiums outstrip costs in central business district office buildings in other areas.

Auckland CBD office block owners can expect to be regularly paying more for services and charges than commercial investors in Hamilton, Wellington or Christchurch.

In its examination of the charges, the council has taken account of the fact that office tenants pay for their own premises and take care of their own electricity bills, cleaning fees and the security of their premises.

But office blocks have a lot more to them than just the tenanted areas and investors are still up for the charges for common areas such as foyers, lobbies, lifts and stairwells, as well as ongoing costs involved in maintaining the building and keeping its services running.

Building operating expenses in Auckland's CBD office blocks are the highest of any city in New Zealand, at a median $71 a square metre, double those of Christchurch CBD office blocks at $38.47 a square metre, the council estimates.

Seem unfair?

Don't forget that Auckland's CBD office investors also get about double the amount of rent on average: $214.72 a square metre annual rental income in the Queen City versus just $140.10 a square metre in Christchurch.

So it is not so unfair after all. Investors who get more rent from their tenants can theoretically afford to cope with the higher costs.

The Property Council - which represents the interests of building owners and managers, service providers such as lawyers and contractors and some major tenants - has worked out an industry benchmark for investors to show what they could expect to pay for rates, insurance, cleaning, repairs and maintenance and other aspects of property ownership.

Its estimates are based on the costs for every square metre of space rented to a tenant and are expressed as a median, being the mid point between the highest and lowest charges.

"Sometimes, investors buy a building without knowing about these charges," says the council's research department manager, Nicole Humphries.

"But we tell them that before they buy, they should check out the area of costs thoroughly, as it is part of the burden of ownership.

"Also, existing owners can use the guide as a yardstick, to gauge whether the amount they are being charged for cleaning of common areas, for example, is about the right amount and the market rate, or higher or lower than could be expected on average."

Investors in Auckland's CBD can expect to incur the highest outlay for their office buildings compared with investors in other big centres, based on the council's estimates.

In Auckland, total fixed charges of rates and insurance show up as a median of $31.41 for every square metre of space rented annually.

The next most expensive place to own an office building is in Wellington's CBD, where rates and insurance median costs work out at $26.43 a square metre.

"The earthquake risk in Wellington increases insurance charges there, which we have found to be higher than elsewhere in New Zealand," says Nicole Humphries.

"Insurance charges in Wellington are a median cost of $4.17 a square metre of office space, compared to $3.19 a square metre in Christchurch, $3.08 in Auckland, $2.69 in non-CBD Auckland offices and only $2 in Hamilton, which appears to have much lower insurance charges than other main centres in New Zealand."

Auckland's non-core CBD office blocks are the third most expensive in fixed charges, the median for rates and insurance there costing $20.54 a square metre. Hamilton comes fourth on the chart - the median cost of rates and insurance is only $13.50 a square metre of office space.

Christchurch has the lowest median fixed charges - two-thirds lower than in Auckland - at only $11.84.

But rates and insurance are just part of the equation.

The council has a long list of other likely charges for office buildings, which it puts under its "operations expenses" category.

Those are:

* Administration - the costs of managing the property.

* Building supervision - costs such as a doorman or dedicated caretaker.

* Cleaning of common areas, such as the foyer and the exterior of windows.

* Fire protection costs, including the cost of maintaining and/or upgrading sprinkler and extinguisher systems, replacing detectors and alarms, repairs and tests to the system.

* Carparking - signage, wages, repairs, maintenance, cleaning and lighting.

* General fees - rent review fees, valuation fees and leasing fees.

* Total energy costs, including the heating or air-conditioning of common areas, lifts, escalators and common area lighting.

* Payments for maintenance and repair charges on lifts and escalators.

* Repairs and maintenance of the building.

* Security of the building generally.

* A sinking fund - money from tenants used for major plant replacement or building repairs.

* Heating, ventilation and air-conditioning - the total costs involved in running and maintaining these systems in the building.

* Sundries - the cost of piped music into common areas, gardening and signage.



* Energy bills.

* Water and sewerage charges - public services charges for water and sewerage provision.

* The cost of the building's warrant of fitness and compliance with the Building Act.

"Commercial investors have to take account of all these expenses when they are examining the costs of ownership versus the returns," says Nicole Humphries.

Two separate profiles of operating expenses have been done: one on Auckland non-CBD office buildings over 3000 sq m in area, and another by location.

The Auckland sample was conducted using nine buildings as a sample size.

"The figures there have to be used with due caution," says Nicole Humphries, but she notes that they give investors in that segment a broad idea of the costs.

Property NZ