Level up your property game

Residential landlords have it tougher than ever right now and while new policy may have pulled the plug on decent returns and capital gains, things are certainly looking up for property investment of a different kind.

Words Owen Cooney  |  Photo Jahl Marshall

Buying a residential rental property has been the "go-to" investment for ordinary Kiwis for decades. Many of us have used the equity in our family home to leverage into a residential property portfolio and build our wealth over time. But today, skyrocketing house prices mean the days of buying a good quality rental for $400,000 are a long-forgotten dream.

Interest on loans is no longer tax deductible, and the healthy homes requirements mean landlords must pay (sometimes hefty sums) to upgrade the heating, insulation, ventilation and so on. Interest rates are rising and banks are not as forthcoming with mortgage approvals as they once were.

What most Kiwis don’t realise is that, with the right tactic, commercial property can be a more affordable alternative with even better returns on your investment. High-rise buildings, shopping malls, health hubs, childcare centres and commercial offices all may seem out of reach to the suburban home investor, but the good news is you do not have to be a multi-millionaire to own them. 

Classic Collectives Limited establishes private collectives of individuals who are willing to collaborate to become joint owners of premium commercial and/or industrial property. From supermarkets in Pōkeno to community shopping centres in North Canterbury, they identify high-quality buildings and bring the right mix of investors together to purchase and lease them.

Some of these investors are retirees or nearing the end of their working careers – but there’s a rise in people in their 30s and 40s who see the opportunity to establish a sound investment that will not only provide income, but also have growth potential. 

By collaborating with other like-minded individuals, it’s entirely possible to own a share of a substantial commercial building. The benefits of the collectives include receiving a positive yield from the get-go, and having independent professional management so there is no day-to-day workload or responsibilities involved.

So instead of driving past your rental property and noticing the grass is overgrown, you can level up your investment portfolio by just investing smarter and take pride in knowing you own a significant multi-million
dollar asset – however many stories high it might be! 

invest@classiccollectives.co.nz

Classiccollectives.co.nz

The big squeeze

Are rising interest rates and low capitalisation rates making you nervous?
Owen Cooney from OC Consulting advises investors on how to withstand “yield squeeze”.

Photo Jahl Marshall

Commercial property has been a passion of mine for decades, but the economic environment we are all accustomed to operating in is changing.

For as long as I can remember, there has been a differential between the interest rate paid on mortgage debt and the yield (or capitalisation rate) received from a property. However, with interest rates now rising, the cost of debt will soon be similar to, if not greater, than the capitalisation rates a commercial property can reasonably generate.

In recent years it has been common to use debt to increase yield to an investor because that debt was so cheap. But thanks to inflationary pressures and rising interest rates, investor yields are being squeezed – and will continue to be squeezed until the market adjusts. 

These comments are, of course, a generalisation. There are always markets where some purchasers will happily accept a very low capitalisation rate for a particular property. It’s also worth pointing out that investors who don’t need to take on debt to purchase a commercial property will not feel that same squeeze!

But the investor collectives we help set up at OC Consultancy Ltd do use non-recourse debt and will continue to do so. Instead of leveraging a property at 45 percent to 50 percent of LVR, we now intend to leverage at around 30 percent to ensure the smoothest path forward as New Zealand’s Reserve Bank battles to bring inflation back under control. 

In our post-pandemic climate, there’s no escaping yield squeeze for the foreseeable future. But our message to investors is this – yields are only one factor that should be considered when making an investment decision.

You may be familiar with the advice of Warren Buffett regarding investment as a long-term game. Buffett famously said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” Unfortunately, in our recent bull market, this message has been forgotten by many.

In the commercial property context, our focus is on securing long-term leases with good quality tenants and covenants. This, coupled with robust rent review mechanisms, is the best way to protect your investment from the effects of inflation and yield squeeze.

To be a successful property investor, you must look beyond what’s happening right now and see what is most likely to occur in the future.

We are confident that good commercial property will stand the test of time and be resilient. Just like any other investment, you must be prepared to weather the ups and downs of each economic cycle and keep your eyes firmly on the horizon of what’s to come. 

The right building, with the right tenant and the right lease arrangements in place, will always be profitable in the long run. 

occ.nz

Selling trust

Owen Cooney Consultancy brings a change of mindset to traditional investment strategies.

Words Nicky Adams / Photos Jahl Marshall

Before making any investment decision, Owen Cooney uses what he calls the “mum test”. “I ask myself if this is something I would want my mother involved in – if the answer is no, then I walk away.”

A partner at Tauranga-based law firm Cooney Lees Morgan (CLM) since the 1980s, Owen was founding partner of the firm’s hugely successful property development division. Owen was responsible for putting together groups to acquire premium property assets. Not only did he enjoy this, but he saw the benefits that could be gained. As his appetite increased, Owen’s career saw a shift in direction, and after retiring as a partner from CLM in 2020, he decided to continue with what had developed into a passion project.

Establishing Owen Cooney Consultancy at the end of 2021 seemed like the next natural step in a journey that had really started as far back as 2008 when, together with his mother and brother Pete (managing director of Classic Group), the family had been keen to purchase an investment property. “When we started looking around, we couldn’t see anything that we considered premium in that $2-3 million range. That led us to the conclusion that looking in the $10 million-plus range took us out of the ruck and above a lot of the private buyers. There was less competition, and at that price we found a different level of building.” 

When it came to starting up the consultancy, Owen already had an established client base, most of whom would have known or dealt with him over his many years at Cooney Lees Morgan. It also provided a seamless opportunity to continue working alongside his family, with OC Consultancy operating in conjunction with Classic Collectives Ltd (a joint venture company). However, part of the business model for OCC is the idea of bringing investment opportunities to a bracket who hitherto may not have looked to large commercial investment as a viable option. Those with less financial resources to invest quite feasibly might not have considered this type of opportunity would be open to them. 

“Traditionally, young Kiwis wanting to build a bit of wealth for themselves have bought a rental property. In the early 2000s there was a real boom in the concept of residential property investments – that’s been the formula for generations of Kiwis. But now it’s not quite the same – residential property has increased by 40 percent in the past 18 months, raising the deposit has become too hard for a lot of people, and the government has taken off the tax deductibility. Plus, there’s the complexity now of the tenancy laws. So, owning a private rental property is less attractive and quite hard for a lot of people.”

Commercial investment, on the other hand, requires something of a mindset change, as does the concept of pooling resources. “You’re playing as a team rather than individually. It’s risk free from the point of view that in the structures we set up you’re not exposed to risk personally. The only risk you have is losing the money you put in, which is a risk any investment has. You put your money in, you get a yield straight away – a monthly return on your money. Being involved in a larger team we can access better properties with better tenants that are going to pay the bills.”

The skill of OCC is sourcing premium properties that will bring passive investment. “Developments are too risky; we don’t bring those to these clients. Under the banner of commercial, industrial properties are considered the darling of the market. Supermarkets are a great investment. We’ve got an open mind as long as it ticks the box of long-term security of the rent.” For their part, investors need to consider this a long-term prospect, of a five-year time horizon. After this there is a strategic review (although an exit strategy can be triggered before five years).

With the benefit and comparative ease when put against a residential investment, the appeal for not just the seasoned investor, but also the younger market looking for a way onto the wealth ladder is multi-faceted. Spearheading this aspect alongside Owen is business development manager Melanie. Having worked with Owen since last year, she is excited not just about the prospects for younger clients, but also about Owen’s personal mentoring skills. “Owen would never say this about himself, but he’s awesome at helping others do better, educate and grow. There’s a better future when you’re in the game with Owen.”

As for the bottom line, Owen states: “In terms of the amount invested by individuals, of the existing investor groups we have, it varies from $250,000 to $1.5 million. As for the question of how you qualify, for now we’re working on the basis that we’re a boutique business with many of our investors being old clients of mine. What we’re selling is trust. If someone trusts us and they want to be a part of this, we’re happy to talk to them.”

Email info@occ.nz and reference: UNO 

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