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Feb 16, 2024
Is 2024 Starting To Turn The Corner?
Say goodbye to 2023, which according to many commentators had the worst commercial sales in nearly 30 years. Buyers were nervous with the cost of living and rising inflation, with high interest rates and an election season which seemed to occupy nearly 6 months of the year. While inflation is slowly trending down, there is still significant uncertainty as to when the Official Cash Rate (OCR) will begin to track below 5%. Initial expectations aimed for a midyear adjustment, but it appears more likely to be in the last quarter of 2024. With a low volume of sales for the last 18 months, data on value and returns is limited and the first question on a seller’s mind is “What is my property worth”? This is reflected in many properties being offered as “By Negotiation”, as vendors were uncertain as to meeting buyers expectations and sought to find the middle ground. Already this year we can see a change happening with prices being stated or asking for offers over a value. Construction costs appear to have stabilised and with the prospect of lower interest rates coming, the new build option becomes more attractive. As with any cycle, well designed properties in good locations have been in demand. However the challenge has been readying properties for sale or lease where factors such as location, design, layout, or value present questions for the purchaser. Those in the market for a property may need to broaden their expectations to successfully navigate deals.
Nov 24, 2023
Gearing Ratios
Apologies to the motorheads out there, but this is the financial ratio used to compare the owner’s equity (capital) or asset values to the debt borrowed. The debt-to-equity ratio is a crucial financial metric that compares the owner's equity (capital) or asset values to the borrowed debt. Its significance lies in how it compares to similar businesses, rather than the actual number. Each industry or business model operates within a specific range that may not be sustainable for others. In general, a high Debt to Asset ratio indicates that a company may be over-leveraged, meaning they have taken on too much debt in relation to their asset values. This can make the company more vulnerable to financial difficulties, particularly if they experience a downturn in business or a recession. On the other hand, a low Debt to Asset ratio may indicate that a company is less risky and has a stronger financial position. Equity to Asset and Debt to Equity ratios are also important indicators that investors and lenders consider when evaluating a company's financial health. Equity to Asset ratio measures the amount of a company's assets that are financed through equity, while Debt to Equity ratio measures the amount of a company's assets that are financed through debt. Ultimately, understanding the relationship between asset value, debt, and equity is crucial for any business owner or investor looking to make informed financial decisions. By analyzing these ratios and their implications, individuals can gain a deeper understanding of a company's financial position and potential risks. When considering debt financing for your business, it is important to understand the implications of your debt-to-equity ratio. A debt-to-equity ratio is a financial metric that compares a company's total debt to its total equity. This ratio is used to evaluate a company's financial leverage and indicates the proportion of financing provided by debt versus equity. A higher debt ratio may indicate that a company is under greater pressure to service its debt than to generate returns on its invested capital. Conversely, a lower debt ratio suggests that the company has a higher equity ratio and that its assets should be sufficient to cover external creditors. It is important to note that debt financing is not always a negative for a business. If a company operates high-value assets, a high gearing ratio (above 50%) may be normal for the industry, as raising sufficient equity to fund these assets may not be available. However, for most businesses, a debt-to-equity ratio in the range of 30% to 40% is common, and many public entities operate within this range. If a business is too lowly geared, it may indicate that the business is not growing as quickly as it could be, as the equity is tied up in fixed assets rather than in cash flow. Therefore, it is important to strike the right balance between debt and equity financing to ensure the financial stability and growth of your business. The ratio being referred to here is the debt-to-equity ratio, which is calculated by dividing a company's total liabilities by its shareholder's equity. This ratio is an important measure of a company's financial leverage, indicating the extent to which it is financing its operations through debt. A high debt-to-equity ratio suggests that a company has been aggressive in financing its growth with debt, which can be risky if the business experiences a downturn. On the other hand, a low debt-to-equity ratio may indicate that the company is not taking advantage of opportunities to expand and grow. When comparing the debt-to-equity ratio of one business to another, it is important to consider the industry and market in which the businesses operate. For example, certain industries may require more debt financing than others, and a high debt-to-equity ratio may be more common and acceptable in those industries. Overall, the debt-to-equity ratio is a useful tool for investors, lenders, and other stakeholders to assess a company's financial health and risk profile.
Oct 16, 2023
Valuing Your Business
A true value is that agreed between a willing buyer and seller. A different buyer and seller with the same product may agree a differing value. Particularly in the SME (Smal Medium Enterprise) area, valuing your business can be difficult, as for the vendor the value of the heart and soul they have put into the business does not always equal the value seen by the buyer. The reason for selling comes into play. Have you grown the business to the point where you need help or just desire an exit? Is it due to a partnership or marital split? Is there a timeline involved? The three main bases of valuation are asset based, market based and earnings based. Normally at least two of these are applied to verify your answer. Asset based valuation is set around a fair value for the tangible and intangible assets. Market base looks at similar businesses for sale or sold. Earnings base valuation applies a multiplier to the discretionary business earnings. Discretionary earnings are the cash flow generated after paying normal operating expenses which is available for owner remuneration, debt servicing or retention. To accurately do your valuation you will need an understanding of the industry, it’s current market trends and any risks the business faces regarding key staff, technology, and legislation changes. Is the business operating in a competitive market? Is it a dominant player in the market? Is the value of the business tied up in tangible assets such as plant and stock or intangibles such as contracts, intellectual property and databases? Particularly with intangibles, how transferrable are they? Finally, ask yourself the question “What would I pay?”. Valuations are only opinions, albeit based on specific criteria and history. So, we come back to the opening statement. An arm’s length sale between a willing seller and buyer is the true value. Call Wayne on 027 498 3312 to talk about anything commercial.
Sep 13, 2023
What is Yield?
The dictionary defines yield as “something that is gained in return from an input of goods or services”. From a property perspective yield is the value of the net rental income divided by the current property value, this is also known as the capitalisation rate. It measures the cashflow that you receive on an investment normally calculated on an annual basis. The capitalisation rate reflects the security or risk associated. Higher risk = a higher cap rate which also equates to a lower market value reflecting the shorter expectancy of the return. Lower risk = a lower cap rate giving a higher market value reflecting the expected longevity of the return. Cap rate also indicates the duration of time to recover the investment value so 6% takes 16.7 years but 10% will only take 10 years. Simply put if you want a quick return then likely there will be a higher degree of risk associated with it such as short-term leases, susceptibility to governmental changes or other external factors. The key to effective use of yield in your decision-making process is the stability of the income stream. Commercial leases tend to be relatively stable but future risks from tax changes, market influences and zoning changes all need to be taken to account. Generally as inflation pushes interest rates up the cap rates tend to increase as the risk factor changes although the cap rate tends to operate in a narrower range as supply and demand issues often mitigate this. We are currently seeing this happening in our markets now. Cap rates tend to range between 4% and 10%, as while below 4% is very secure, the length of time to recover the investment is too long for most investors. The opposite occurs when cap rates go over 10%, the return is good but the implied risk is often to much.
Aug 21, 2023
Commercial Property Investing
Confused about the terms you see and hear and what do they mean and are they relevant to you? Whether you are looking from a purely investment point of view or are a business owner wanting your own premises the basic steps are the same. Rental yields on commercial property typically are higher than on a residential property and with leases ranging from 3-15 years there is more long term income security. Leases are often indexed to the CPI and/or periodic market review and tenants are normally responsible for the outgoings such as rates, water and insurance. Location is key and whatever type of owner you are your choice is important as it is the one thing that cannot be changed. Proximity to transport infrastructure existing or proposed, public transport options either for employees or customers, ease of access to the property for goods or services. To an extent the building structure can be changed to fit your requirements, but the location cannot. A buildings quality is defined as the physical resilience of the base build and the nature of the improvements and fittings together with the floor plan. More often now the importance of environmentally friendly construction and aspects such as natural light, play a part in the investment decision. Creating added value in a commercial property often involves working with your tenant as they go through periods of growth or shrinkage to adapt the space they need so the tenancy is maintained. For the owner/occupier the approach can vary a little as they have a more specific goal so the parameters can be set to fit their own requirements whereas an investor probably needs to have more flexibility. Over the next few posts we will try and explain some of these terms as simply as we can.
Aug 3, 2023
Thinking about buying a business?
According to a recent RNZ article, we have hit a 35-year high in people who have an interest in buying. Unfortunately, most are sitting on the sidelines awaiting more certainty in both the political and financial sectors. A major business broker said they had generated over 3000 confidentiality agreements in the last quarter but that had not generated to sales which were down by 8%. Locally we are seeing something similar with a high level of enquiries from both investors and working proprietors but within the current market either the actual return is not great enough or the financial risk for the potential return is too high for the banks. It is common for business decision-making to go into a holding pattern in the months prior to an election and we can only hope that once a result is known, confidence returns and prices have had some resilience. As the saying goes “Good things take time”, so if you are of going down this track take the time to properly research your venture, so you have all the necessary information to make the right decision. Make sure your business plan is complete, not just the financials but showing you understand where the market is now for your venture and your strategies for future growth but also how you will handle any negative aspects that may occur. We are always happy to have a chat about our listings, or talk to us about your venture and maybe we can help you locate that base of operation.