Farmers have looked beyond the farm gate to invest in commercial property for centuries.
Many in the farming community are well versed in the benefits that come from owning an office block, a retail premise, a factory, or similar.
Such an investment project might range from subdivision through to the hands-on task of full commercial property development. Sometimes individuals take this on by themselves, though for more significant commercial property investment, pooling resources to form a syndicate of like-minded farmers with a shared goal can be the best way to maximise returns.
You might consider investing in commercial property for several reasons:
- Diversification: commercial real estate can diversify your investment portfolio, reducing risk associated with fluctuations in farm gate income.
- Additional income: with good tenants, owning commercial property provides steady rental income to supplement revenue from primary production.
- Tax benefits: commercial property ownership often comes with tax advantages, such as depreciation deductions and property tax benefits.
- Long-term appreciation: commercial real estate will generally appreciate over time, in which case when sold it will provide a capital gain.
- Retirement planning: investing in commercial property can be a part of your strategy aiming for a source of retirement income when you’ve wound down your farming career.
- Succession planning: commercial property can help provide for members of the next generation who are not inclined to actively take over the farm.
- Business expansion: farmers can use commercial property to expand or diversify their farming operations or to start a new business.
- Asset protection: diversifying assets into commercial real estate can offer protection against agricultural market volatility.
However, investing in commercial property comes with its own set of risks and responsibilities. These vary and include earthquakes, fluctuating interest rates, and tenants leaving unexpectedly. Investing in commercial property is comparable to investment in farm land, and the two classes share similar risks, albeit with different outside influences. If you want to assess which is the better investment, a rule of thumb is that although a commercial property investment with a locked in tenant should give you a better regular income, farm land has historically provided a higher long term capital gain. Either way, being able to commit your capital for at least the next five years is key.
Understand the risks, assess how much appetite you have for them, and work out how to mitigate them.
In addition, before committing your capital to an individual opportunity you need to carry out a thorough assessment of the local market, understand the basics of property management, and undertake due diligence on the financial feasibility of the proposition under your consideration.
While some prefer to do their own research, consulting a financial advisor and a trusted real estate professional will improve peace of mind.
A good investment property needs to meet several criteria: a long lease, to a dependable tenant, paying a reasonable rent will tick most of the boxes, though these are not easy to find, and tend to be carefully guarded.
Our best recent sale provided the purchaser with a return above six per cent. This for a deal below $1 million, with rent above $55,000 per annum: once you hit the $1 million mark for an investment, it becomes more difficult to make the proposition stand up, any capital outlay below that amount is easier. That project was well worthwhile. If what you are looking at doesn’t tick all those boxes, it could still be worth considering, though might require more ongoing input from you to ensure the right outcome.
One other useful rule of thumb: it helps to be able to drive past what you’ve bought. As in other regions, most South Canterbury commercial investment is held locally, if not out of Christchurch or Nelson, while in the 1990s we had interest from cashed up Southland farmers and syndicates who had benefited from selling farms for dairy conversion. Not much North Island money is tied up in our region’s commercial property.
Although on the face of it the current economy might not seem like the best time to contemplate new investment, fortune favours the brave, particularly when their courage is supported by diligent research and sound advice.
Peter Wilson of PGG Wrightson Real Estate, Timaru is the third generation of his family in the local property sector, continuing a name trusted in South Canterbury since 1935. Marketing real estate in Timaru since 1984, at any one time Peter carries an array of commercial, retail and industrial sale and lease listings, ranging from lower end investment opportunities to larger scale multi complex offerings.