Diana Clement: Take a chance - advance to Go

There can be few adults who haven't bought and sold commercial property: Pall Mall, King's Cross Station or Mayfair.

Real life Monopoly is becoming increasingly popular - especially among residential landlords who now suffer poor yields, often as low as 5 per cent, and the ongoing nightmare of problem tenants.

Capital gains haven't been all that bad in recent years either. Research by the Property Council found that the average return from commercial property across the country including capital gains and rents for 2005 was more than 18 per cent.

Advantages of commercial property investment include:

* Tenants rarely ring you up complaining.

* Capital gains fluctuate less.

* Yields are higher than those on residential property.

* Tenants pay for internal maintenance and all outgoings such as insurance and rates.

* Owner occupiers can sub-let to reduce the cost of occupancy.

* Management fees are low at 2 to 5 per cent.

* Value can be added by improving leases.

* The commercial market cycle is independent of the residential one.

Getting started means finding the right property and you'll need to make friends with commercial real estate brokers to do that.

Your choice is retail, office and industrial - but the latter should be avoided by novice investors unless they know the tenant because such buildings are often industry specific, says Stuart Wills, director of Mortgage Link West Auckland.

Disadvantages of commercial

Speak to anyone who has invested in commercial property for real and they'll usually sing its praises. Yet, says Matthew Gilligan, of specialist property accountancy firm Gilligan Rowe & Associates, "with residential, if you lose your tenant, the value [of the property] doesn't diminish, and the cost of refitting residential property is relatively low compared with commercial property.

"If you lose your cashflow on a commercial property, the value drops - unless you are in a prime location."

Generally, commercial property is more expensive to buy than residential and most advisers suggest that the $1 million to $2 million level is a realistic starting point.

There are commercial buildings to be had for much less but at your own risk. If you fancy buying a shop/warehouse in Patea with two titles and two road frontages, it could be yours for $79,000 + GST. But we should point out that this building has been listed on Trade Me's commercial property listings for some months with, it would appear, no apparent takers.

Mortgages

One of the biggest deterrents to commercial property investment, apart from the higher initial cost, is the lower loan-to-value ratio (LVR) available from lenders. Typically, says Wills, lenders are only willing to lend 66 per cent to 75 per cent - depending on the quality of the lease and the tenant.

High net worth individuals raise as much as $1 million on their own home (in the name of the business that will own the building) to put a deposit down - raising the remainder of the finance from a commercial lender, says James Lockie, director of non-bank lender General Finance.

Commercial loans have fewer discounts than residential ones and it's not possible to fix interest rates. But clients generally purchase a "hedging" - which is similar to an insurance policy that guarantees the interest rate will not rise above a certain level within the period of the loan, says Wills.

Location, location, location

Location is just as important in commercial property as it is with residential.

Wills says several clients are looking at commercial property investments around the new Sylvia Park development at Mt Wellington, and in the Ponsonby/Karangahape Rd city fringe.

Features of a good commercial investment include:

* Land area - the bigger the better.

* Vehicle and foot traffic.

* A decent number of car parks.

* Ability to have modern communication and wiring.

* New developments in the area.

Wills warns clients on surburban areas citing the example of Panmure - which 10 years ago was booming and is now full of "cheap shops".

Good advisers

Sooner or later you're going to need a good accountant and lawyer to deal with the tricky stuff such as factoring in depreciation, trusts and GST.

Syndicates and property funds

For those who want to spread their risk, commercial property syndicates might be the answer.

Another alternative is buying units in listed funds such as Property For Industry and AMP Property.

More help

Peter Aranyi's book Commercial Real Estate Investor's Guide is a useful read for budding investors. It's also possible to find like-minded investors on the websites landlords.co.nz and propertytalk.com (see links below). The Auckland Property Investors' Association holds monthly commercial property investment evenings.