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New Zealand property investment opportunities – Security and Cash-flow in Dunedin.

26 June, 2012

With New Zealand deposit interest rates at record lows and forecasted to remain low for quite some time, many investors are now returning to property as an alternative investment option that provide relative security and generates reasonable cash returns. Also, with mortgage borrowing rates also at record lows, it makes good sense to consider the effect of gearing on the potential return on equity. I have prepared some projections on several notable properties in Dunedin to show how gearing may work based on current rates. My assumptions re the mortgage borrowing rates are 5.75% (3yrs) for residential and 6.0% for commercial.

129B Forth Street, Dunedin (‘St David Heights’)

 

This is a modern 7-studio room property in a prime university location. It has an outstanding rental history. The vendors have just reduced the asking price from NZ$1,150,000 to NZ$1,090,000. Note that the property is fully managed by a professional property management company, and the financial projections are inclusive of the management costs, together with all other normal operating expenses, including body corporate fees.

Projections (estimate only)

Purchase price:                                                          $1,090,000

Borrowings (60%):                                                     $654,000

Cash input (equity of 40%):                                        $436,000

Annual NET cash-flow (EBDIT):                                  $69,718

LESS bank interest (5.75%):                                       $37,606

NET annual cash flow:                                               $32,133

Equates to pre-tax return on equity                           7.4% (at 60% gearing)

In the interests of conservatism, the projected return excludes any provision (upside) for potential capital growth, which has historically been very good in the university investment market.

 

90 Crawford Street, DUNEDIN

 

This is a high profile commercial building on the main northern arterial traffic route (State Highway 1) into Dunedin CBD. It has very good street exposure to Crawford Street, and also a second frontage onto Bond Street. Other features:

  • Freehold tenure in one title (approximately 701m²)
  • Solid reinforced concrete construction with recent renovation work completed internally
  • Total net income of $131,636 per annum plus GST
  • Favorable lease configuration with six separate lessees strengthening the investment profile of the property
  • Strong business profile with well-known tenants including Gordon Creighton  Lighting, and Jennian Homes as the main retail tenants

Projections (estimate only)

Purchase price:                                              NZ$1,470,000

Borrowings (50%):                                         $735,000

Cash input (equity of 50%):                            $735,000

Annual NET cash-flow (EDBIT):                      $126,636

LESS bank interest (6.0%):                              $44,100

NET annual cash flow:                                    $82,536

Equates to pre-tax return on equity               11.23% (at 50% gearing)

  

598 Castle Street, Dunedin (Units 1 & 2)

 

 These Castle Street flats are impressive student investment properties in absolute prime location adjacent to the university. They comprises2 six-bedroom adjoining unit-titled flats, approximately 10 years old with two bathrooms on different levels. Other points:

  • Durable material construction, aluminum joinery and low maintenance sections.
  • Located in the heart of the prime campus area, these properties have strong appeal to students who compete to rent these flats every year;
  • Rents were increased to $130 per room for each flat in 2012 giving an annual income of $40,560  per flat which provides a yield of 7.2% on asking price;
  • The owners are advertising rents of $135 per room for 2013 in line with market increases. Unit 1 has already been signed for 2013 in early June this year at $135 per room;
  • Within easy walking distance of University campus and Otago Polytechnic and within one block of the University’s newly proposed Marsh Study Centre; saving the walk through campus to the Central Library to study;
  • Off-street parking which is very attractive to students in an area where parking is limited;
  • Excellent rental history with full year leases at market rent levels.

Projections (estimate only)

Purchase price (for 1 unit):                          NZ $565,000

Borrowings (70%):                                         $395,500

Cash input (equity of 30%):                            $169,500

Annual NET cash-flow (EBDIT):                      $36,700

LESS bank interest (5.75%):                           $22,741

NET annual cash flow:                                    $13,959

Equates to pre-tax return on equity               8.2% (at 70% gearing)

In the interests of conservatism, the projected return excludes any provision (upside) for potential capital growth, which has historically been very good in the university investment market.

66 MacLaggan Street, CITY TERRACE

 

Brand new (estimated completion end August 2012) units an easy walking distance to the city centre, and close to schools like Otago Boys, Otago Girls, Kavanagh College.

  • 2 units – fully furnished with carport and lockup – only $282,000 and $288,000
  • This is part of the next stage of the existing City Terrace complex, which already comprises six fully completed units with very strong tenant demand, mainly from professionals and senior students. These new units already have tenants wanting to commit to long leases (at least 12 months) at $410pwk.
  • The modern design and fit out provides a spacious living area. An energy efficient heat pump, double glazing and good insulation help provide a warm and comfortable environment.
  • Ideal as ‘minimum fuss’ investment, for owner-occupier, or as a ‘lock-and-leave’ town base.
  • Professionally built by G.J.Gardner Homes, with a builders guarantee.


Projections (estimate only)

Purchase price:                                             NZ $282,000

Borrowings (80%):                                         $255,600

Cash input (equity of 20%):                            $56,400

Annual NET cash-flow (EBDIT):                      $17,074

LESS bank interest (5.75%):                           $12,972

NET annual cash flow:                                    $4,102

Equates to pre-tax return on equity               7.3% (at 80% gearing)

Note: The lower return of this property reflects the fact that it is new.

All examples are projections only and should not be relied upon. As always, you are advised to obtain your own independent professional advice. All figures are shown in $NZD.

As these examples illustrate, it does make sense to consider alternate ways to structure your investment and maximise returns, especially in the current low interest rate environment. These examples are necessarily simple, and do not include allowance for capital growth potential or personal tax savings, which may further enhance the overall return. Overseas investors should also consider exchange rate issues and prevailing laws and regulations that may be country specific. Note that the above examples do NOT require approval from the N.Z. overseas investment commission which makes them a relatively simple N.Z. investment.

Please feel free to contact me peter.gale@colliers.com if you have any questions or comments, or wish to find out more information about these or other investment opportunities. You can also check out my profile here.

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