Making a sound commercial property investment requires a complex process of investigation. It’s not like in the movies when a canny character sees an interesting property, accurately visualises its potential and immediately reaps the financial rewards. Far from it.

In reality, it’s necessary for investors to undertake significant research on the wider market and the location they are interested in. They then need to carry out intensive due diligence on any property that looks like it could be a deal.

Such research is not easy. It’s possible to miss out key information if rushed. So the process must be painstaking and rigorous. We talked to a couple of veteran commercial investors to get their advice on how best to tackle the research involved.

The Two Rs Of Research

Relationships are key to the research process for well-known Auckland investor David Whitburn. But his first research tip is to do some intensive reading on a wide range of material. That’s because “knowledge is power”, he says.

His suggested reading material includes property reports from the likes of Colliers, CBRE and JLL; analytical data from companies like CoreLogic and Infometrics; council reports relating to the location the investor is interested in; and articles from reputable property journalists.

Whitburn says this material is full of information which helps develop a good macro-understanding of the market. “It’s critical to be informed and educated about what is going on in the market. It ensures you are up-to-date on everything from trends to values to local news. And it can give you some good tips too.”

Building a network of solid relationships with commercial bank managers and specialist agents, as well as fellow investors active in the field, is also critical.

He says this is helpful because it can be harder to get information on commercial property. “But a network of people who are involved in the area will give you a better picture of what is going on. Their subject knowledge is good and they will share it.”

“It’s important that agents are active in, and knowledgeable about the area and sector that you are interested in,” Whitburn says. “Because it’s not going to help you to talk to a CBD office specialist if you want to buy an industrial property in West Auckland.”

“But one who fits the bill can be a goldmine. They can give you the heads up on good opportunities that come on to the market. They can tell you if a property has issues and the sort of money involved in fixing those issues. And they tell you if there’s infrastructure or development planned for the area.”

In terms of due diligence, investors must ensure they have a solid team to work with, he adds. That includes an expert commercial property lawyer who knows leases really well, an accountant, a building conveyancer or a surveyor and, potentially, a registered valuer.

Think About Why - And Then How

For long-time investor Jeff Brill, who is the author of a book on commercial property investment*, investors need to establish why they are investing before embarking on their research. He says the reason is likely to be to make a profit by improving a property and its rents; for retirement; or to grow a portfolio. But the “why” will shape the research an investor needs to do.

If an investor’s “why” is to make a profit or grow a portfolio, they should pick a location based on its future outlook and growth prospects, including any planned developments nearby. They need to research the current market rental per square metre for the type of property they are keen on. And, with specific properties, they have to establish things like when the next rent review is, and if the tenant is happy or if they need something, like more space, to stay.

If the “why” is for retirement income, an investor should go for a larger town or city and for a property with a long-term tenant. They need to find a tight lease of six years-plus with favourable rent reviews and a hard ratchet clause. And they should research whether there is, or could be, competition for the type of property they are interested in as this could impact on the rent and value of an investment.

Brill says to do this properly it’s necessary for the investor to talk to specialist agents and to look at lots of ads for properties of the type they are interested in. “The best research tools are Realestate.co.nz, Trade Me, REINZ data, population statistics and local authority plans. That’s along with maintaining relationships with a few good commercial agents who have been in the industry for a while.”

It is good to talk to the tenants of a property too, he says. “Find out what their intentions are for the short to medium term. An agent may not know that the tenant is in financial difficulty, intends to leave, wants to grow, wants to sub-lease, wants to turn some of the carpark into floor area, etc. And this knowledge is gold to the investor.”

*The Sophisticated Investor by Jeff Brill is New Zealand’s only recent book on commercial property investment.