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Adding value to commercial property

Smart Active Investment Management applies to commercial property too

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Oliver  Cox, Investment Analyst — Fisher Institutional Property Fund

Oliver Cox
Investment Analyst — Fisher Institutional Property Fund | Email Oliver »

22 January, 2020

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Did you know that at Fisher Funds we also invest our clients money in property? We are one of the few fund managers to offer our KiwiSaver members exposure to direct investment in commercial property, through our Fisher Institutional Property Fund. Our diversified managed funds also have exposure to this fund.

Smart active management can make a big difference to commercial property returns

We are an active investment manager, and we apply our hands on style to our investments in commercial property too.

Did you know - the value of a commercial property can vary significantly depending just on who the tenant is?.... even if the tenant pays exactly the same amount of rent as another one.

We are proud to say we reached agreement with one of the best tenants in the land to lease our Freemans Bay office building. It resulted in a big win for investors - a 30% value increase! 

There are large wins to be had by upgrading tenants to improve the quality, tenure and consistency of earnings.

Valuing a commercial property

One of the key variables in the valuation of a commercial property is the capitalisation rate, commonly known as the “cap rate”.

Essentially, the cap rate is the percentage return an investor is willing accept for taking on the risk of investing. The lower (or “sharper”) the cap rate is -  the higher the value of the property.

The cap rate is determined by careful and detailed examination of recent comparable sales. The property’s physical characteristics, location, lease detail, and tenant covenant are analysed to establish the appropriate cap rate.

The Opportunity

Smart active investment management is about seeing the opportunities and taking educated risks to leverage them.

A recent example of this was when we leased a property our Fund owns in Freemans Bay, Auckland. The property is a large 8,000sqm office building, well located being close to the CBD and with good motorway access and a prominent position on a busy road.

In 2018 the property was fully occupied by two tenants, but each of those businesses were undergoing change, and the property had outgrown their needs.  The first tenant advised they would be vacating, and the second was to follow six months later.

 Our first option was to replace each tenant with medium size occupiers of similar standing – a  relatively safe option that would maintain or marginally grow earnings.  

 Our second option, was to deliberately let the building fall entirely vacant over the next six months and then upgrade and entirely reposition the asset. This option carried more risk, and  the potential for greater reward. This could be achieved by increasing the value of the building by lowering the cap rate.

Do your research, know your market

Through our analysis and research of the leasing market, examining what properties were available and those coming up for lease, we concluded that there were few large leasing opportunities on offer that would suit desirable quality institutional tenants. We established this was our competitive advantage, but there was only a limited window where we could capitalise, before other similar properties would become available and erode our position.

Taking advantage of the market to get a big win for investors

Being a long term value investor, we positioned ourselves to look beyond just the short-term income generated, and to work on the bigger picture - improving the quality and consistency of those earnings.

Through a targeted marketing and leasing campaign, we successfully secured the NZ Police to lease the entire building, within six months, in one of the biggest Auckland office leases of 2019.

NZ Police is one of the most desirable tenants in New Zealand because of its creditworthiness as a government entity.  Adding to this, a freshly upgraded building, the long duration of its lease and its growth structure, the desirability of owning the asset increased considerably, sharpening the cap rate like a knife – and increasing the property’s value by 30%!

Smart active investment management can make a huge difference to performance. Spotting an opportunity and ultimately having the fortitude to capitalise on it, can result in better outcomes for our clients.



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