Jonathan Wallace talks about how he got started in commercial property, starting with a different mindset and buying his first property at 20 years old, switching from residential to commercial to scale and the importance of focussing on the calibre of the tenant in the commercial property market.
Jonathan also shares some excellent investment insight on the importance of building relationships, getting the right calibre of tenant, working for the downside and investing in a portfolio no matter what stage of the property cycle.
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Ryan: This is the Ryan Marketing Show and you’re listening to episode 25 of 100. Today, I’m with Jonathan Wallace from Wallace Developments and we’re going to be talking all about the design, build and leasing of properties, because Jonathan you’ve leased and built properties for business’ in New Zealand that are pretty much household names right, I’ve wrote some of these down here. You’ve got BMW, Lighting Direct, Manawatu Standard, Ezibuy, BP, it’s almost like a who’s who of New Zealand business. Where did it start, who was your first tenant and how did you get into it?
Jonathan: I’m not really sure, I always started in, I guess my family was in business, my dad was a business owner. He owned a transport company, and my grandfather had his own building company so I grew up expecting, not really challenging, expecting to own my own business. That’s what I expected to do. When I compare myself with my peers, my friends, they kind of expected to get a salary, go and work for someone. So I just started with different mindset, I went to university and I only went there really to pick up some skills and to figure out what I was going to do. I also took the lessons of, that I had seen in my fathers business, mainly things not the do. Which is to have a lot of employees, to invest in assets that depreciated, and high volume low margin stuff so that was stuff I decided I wouldn’t do and I guess I was looking at what I could do. What I could compete in, what I could do with very little capital and I sort of stumbled on property. So that’s what I tried so I thought I would give myself a year, see how it went, I bought a few houses, did them up and sold them, this was when I was 20 years of age here when I finished uni.
Ryan: So you started on the residential side.
Jonathan: Yeah but only for that first year, and then I sold a couple of houses. Figured I made more out of that then I would have made if I had worked for somebody that year. Even though I had finished my, you know I had an accounting degree. Then I looked out and thought, well if I’m going to stay in this business, I’m going to get scale on it, didn’t want to end up with a whole lot of cheap houses like hundreds or anything so that’s when I switched to commercial cause I figured I could get scale easier and manage scale easier.
Ryan: Okay. And what was your first building?
Jonathan: I build a group of five, sort of workshop warehouses, they were about 150 square metres each. Didn’t have any tenants for them, and filled them up and put them on individual titles and sold them. Now there’s a lot of, anguish went in to that, a lot of mistakes but at the end of the day came out alright and I kind of just went on from then and then switched to be primarily tenant focused. So I would work with the tenants and find out where they had a need and then find something to fill that need and that’s the way we primarily operate today.
Ryan: Okay so taking those initial learnings around the commercial property market, knowing how when you apply your capital in the right type of areas you can make high margin, in that first property, how did you go about finding your first tenants? Cause that’s always a big risk, you’re buying commercial that’s completely vacant.
Jonathan: Well see that’s how naive I was I guess at the time, what risk I took because I didn’t have a tenant then I just worked the agents and we just did what we could to get them in there and I mean I thought they were fundamentally a good idea, they were small. They were well built, stand alone units, multi purposing so they weren’t very nice looking but you know they were functional.
Ryan: And I guess you could spread your risk if you had different tenants across in the same building in your first property.
Jonathan: Yeah, you know I think by the time we finished building, we had two of them leased and then I think a sold, to own occupiers to as well. So we had that avenue as well, I had that avenue as well. And it went from there really, but it did take a lot of work and that was spread over quite a period of time you know a year sort of thing.
Ryan: It’s a different business now, what was that point between then and now where you went from just purchasing commercial property into you know renovation or brand new built for purpose?
Jonathan: Oh that’s a slow evolution, I mean we’ve been going 35 years and for the first probably half of that I was working on my own. So we did a lot of things back then for people like Mico Wakefield and Challenge. Becoming back then we were do more stand alone warehouses or something like that but I’d kind of veer the agents get to know the tenants and we’d build stand alone things for them and we didn’t do the building, we would tender the building out but effectively that was the scale I could compete on that stage. One warehouse at a time type of thing, and then we just got, then we switched I guess the big thing was to switch to the calibre of tenants or just be concentrated on the calibre of tenant, so now we deal with a lot of stuff of government and Z.
Ryan: Right so different industries have different economics within those industries and some of them are much better as tenants then others.
Jonathan: Well they are so we’re looking at the strength of the tenant, you know someone who’s still going to be around by the time we finished and, we know we will be around so we have to match it with a tenant who will still last the distance of the lease so we’re very particular now on who we actually deal with. And a lot of that came out pre, we always did it but pretty early on in my career the 87 crash taken on and took some very harsh lessons out of that.
Ryan: That’s what I was going to ask you about it is that, does that then having those types of tenants give you some grace period when the economy go through those ups and downs?
Jonathan: Yeah I mean the lessons out of 87 is there way we organise our business now so we always work for the downside, we always look to cover the downside and pretty much, obviously we are aware of the upside but that takes care of itself so really everything we have to go in we have to have a plan B and a plan C for when things goes really wrong.
Ryan: Does that then so, you know the global financial crisis nine years ago doe that then offer opportunities for you?
Jonathan: That was massive opportunities for us and we had really big growth through there, for once we saw that coming, I saw that coming which was easy enough because it was a year ahead in America so it wasn’t that difficult so on the lead up to that, got rid of everything that didn’t have good tenants or didn’t have a good return. Got rid of bare land or anyone, I made a critical list of who I didn’t think would last the down term, in terms of paying their rent and so we pretty much got rid of that and worked on relationships with the people who were going to last as well. Made a list of the companies and the government tenancies that were going to last and so when that came around we were in really good shape. I would say 80% of the people who do what we did do fell over and so we were, even though the level of activity was down across the market there was very very few people capable of doing it. And we were one of those cause we – so that was a great few years for us at the end of 07, start of 08 through to probably 11 or 12 when people started coming back, 13 and now it’s different all together now we’re having to compete a lot harder.
Ryan: So then you have to then to pay more for the building and the land.
Jonathan: And the contractors, yeah. And we just don’t have there time that we had either.
Ryan: Is that kind of counter balanced against where interest rates are now and the cost of capital?
Jonathan: Yeah that’s very much so, I mean that’s, although the low interest rates has a direct effect on the cost of existing buildings or land as well so they’re higher, but yeah our only real expense or our biggest expense by a long long ways is interest. And so that’s effectively hard over that time so, it’s great news for us.
Ryan: And in terms of, you know, you’re based here in Havelock North in Hawke’s Bay, but your buildings are all around the North Island, where’s exciting right now in terms of investment, economy? From your lens, given that you kind of saw the recession coming nine years ago, from your lens, do you see Auckland for example a massive opportunity or is that kind of all been and gone? Where does the North Island –
Jonathan: No there’s still massive opportunity in the North, where the growth is really ad the grow is in, for us it’s in Hamilton and Auckland and you know circle around that really. As soon as the crash came established an office in Auckland as well we weren’t there prior to that so we started an office there and that’s been really good to us since then because we got in a time when the activity was low so again it was very easy to make our presence felt, like if we did the same thing now we’d be just in a group but then we were – not the only game in town – but you know we were one of the few in town. So we got good opportunities out of that.
Ryan: So you’re really capitalising on those years where it had a big shake out effect on the market place, to have grown into new areas where maybe you wouldn’t have gone otherwise.
Jonathan: Yeah exactly and same with Hamilton and Tauranga we established an office that looks after those two as well, because we saw that as a growth as well and of course we also saw where we knew that things were going to get busy again. It’s a real scramble at the moment so to counter that what we did was work on relationships with our tenants so, now a lot of things we have a bit of an inside track in because we have established our record with some of these better companies.
Ryan: Does the then help you shift them around your portfolio of properties as they grow or shrink?
Jonathan: Very much so, and there’s many that do what we do, I can’t think of any that actually operate throughout the whole country, I mean we have four offices and we have a presence, sort of a presence in the South Island as well it’s not, probably by within a year we will have something permanently there but we do go and service it down there so yeah most developing companies, they will concentrate on a small area but perhaps they grow bigger in that particular area like Auckland or Hamilton where we have four offices that are permanently staffed and active.
Ryan: I guess if you’re servicing those blue chip and government the clients, you’re going to tend to need a national presence anyway.
Jonathan: Well they have branches, I mean at the moment we’re up to our fifth ASB Bank because they have branches and stuff. I think we are doing our tenth Z, so they’ve got places across the country as well so the benefit of being a little more spread across the country.
Ryan: Now one of the unique things about the buildings at least I’ve seen that you tenant out is they are brand new, they’re all one hundred percent up to earthquake strength and they stand out on the landscape, is that something that’s specific that you’re behind out or is that more of your tenant driven of what they want from a property?
Jonathan: No that’s driven by us, we really want buildings that we’re proud of really, to be honest, otherwise it gets a bit boring, and I think thats, over the period of time too we learnt to know where to put the extra costs I suppose, to get the most benefit in terms of aesthetics.
Ryan: And what building are you most proud of?
Jonathan: Oh, I don’t know that answer. We’ve built a few hundred, I don’t know. Once we’ve started the building process I do get bit over it, I guess I’m more interested in the lead up to the..
Ryan: The plans part.
Jonathan: Yeah and getting it thought out and sorted and underway really.
Ryan: For someone that’s listening that may have a few residential properties already and is thinking of dipping their toes into the commercial side because they want that yield, they don’t like what’s at the bank, and they want to almost follow some of what you did early on, what advice would you give to them in the current climate?
Jonathan: Ah, what would I say, well the first thing is to start because a lot of people come and talk to me about this stuff and it’s really good but I know they never get around to starting it so rather than pick markets it’s, I think it’s just best to start. You know there’s just the old cliche stuff but they have to work on location really, not be too concerned about the leases and so forth but they need to know they can hold a building if it’s empty.
Ryan: So planning for the down term.
Jonathan: Yeah, they really are otherwise they’ll get stuck there, cause inevitably it cycles in the market and there will be a down term again. So I think the first thing to will be to actually start, and then find a location that you think is still going to be good in ten years or twenty years and thirty years time and then work on that.
Ryan: So really have that long term view to holding the property.
Jonathan: Yeah look we struggle to make money with the short term view, you’ve got to take a longer term view. It’s quite important really, I mean sometimes you get lucky on a short term but you’ve got to plan for the long.
Ryan: Now, just more on a local sort of Hawke’s Bay area. What changes are you seeing with, for example how retail is changing and how Hastings has kind of evolved over the last ten years, and Napier, there’s been some massive transformations in Napier in terms of the built environment, where..,if you were to paint a picture of the vision of where Hawke’s Bays going in the next ten years what would it be?
Jonathan: I don’t have a lot of faith in the provinces, that’s why we are putting most of our efforts into the bigger centres. If you touch on retail, retails been hit very hard by the big centres or, people travelling to spend their money or obviously the internet so that is really taken, a lot of these things were close to end anyway and you take off 15% of online sales, it really does impact on the retailers so the future of retail, there’s still high street or you know, physical retail but the areas concentrated to a lot smaller area. The area that we would possibly invest in is a lot smaller, if you took Napier for example there used to be two blocks of Emerson Street that were active now that’s down to one, and now we are sort of getting to parts of that one. f you look at Hastings, there was four blocks and now there’s one-ish. One’s okay but it’s not that strong but there’s one, so that’s the sort of, and it will stabilise around about there, that’s just a sign the way retail is.
Ryan: Do you see an upside on the flip side of, you know warehousing, transport logistics, on there industrial side of shipping the goods around direct?
Jonathan: Yeah but they’re centralised as well quite a bit, you know they will centralise out of two or three national distributors but i mean, obviously great stuff with couriers and things who distribute these things around big growth in that but they can be around anywhere too. They’re not sort of location specific. And again manufacturing that’s tended to go offshore or centralise again so that’s pretty tough, offices are okay but you know a lot of the government and big insurance companies have either stopped or shrunk and centralised, back to the main centres so there’s not a lot of great stories really. I think prime retail is still okay, some office stuff is okay, and service industrial is good because everyone still needs to be serviced so, in the provinces. It’s tough to get a compelling story to through a lot of money into provinces, and commercial property.
Ryan: So for the provinces you’re building for a bit of risk or on spec, make sure you’ve already got your tenants lined up but the growth is Hamilton, Tauranga, Auckland as long as you’ve got the right location and profile.
Jonathan: Yeah, that’s pretty much right, yeah it’s why we’re in it anyway, and that’s the basis of how we’re going. We still get really good opportunities in the provinces but we’re mainly looking to go to under market to market rather than in terms of value, we might pick up something that’s under market and we’ll just fix it up till it’s up to market value. But then it’s growth is probably limited, rather than buying it at market value now and hoping it will grow.
Ryan: Got it, okay so it’s more just a fix and flip it around rather than hold for ten.
Jonathan: Yeah and that comes from the value of having a portfolio where we can hold empty properties or under performing properties, we can hold them until we get them right but again that comes with scale.
Ryan: And last question before we finished here around the Christchurch rebuild you did mentioned you were going to the South Island.
Jonathan: We do, we’re in the South Island but we don’t have someone permanently there.
Ryan: No presence.
Jonathan: We travel there yeah.
Ryan: And will that be part of your Christchurch footprint?
Jonathan: No we will put someone permanently in there to service the South Island, we get a lot of opportunities in the South Island, mainly from the opportunities from our activity in the North Island. We could probably service it better.
Ryan: Being local on the ground.
Jonathan: Being on the ground, everyday. So that’s what we will do at some stage.
Ryan: It sounds like you’ve been on quite a journey and I think what I like about your story is very early on you knew what the mechanics of business would end up being successful or close to the wind you’re quite specific about the journey you wanted to take around building capital and not working for a salary. Knowing that as long as you pick the right opportunities, that would help build your own career path and I think you’ve done a fantastic job I’ve seen the news paper today there’s a public article around where you’ve got to, which I don’t know if you think that’s a good or a bad thing but you know congratulations on actually riding all those waves in the economy through good and bad times to get to where you’ve got to.
Jonathan: Yeah it has been good, I was lucky and I do tell people, a lot of people come out of school or university to see me and just to chat about stuff and it was always a matter of starting early. Starting early and get going because most people get to think about this sort of stuff when they are well into their thirties or so, so if you start early in your twenties, A you can afford to make a mistake and B you just seem to pick up those lessons pretty well really. So yeah, my view really was to start and learn as we go. Again property development and investment is a lot more common now but back then it wasn’t particularly, it was insurance companies and a lot of that stuff so it was abit more pioneering. You can sort of go to lectures and read books and articles about how to do it now but it was pioneering back then, and it was a lot looser back then.
Ryan: There’s nothing like having your own money in the game to get the spine tingling effect of when it goes well or not so well.
Jonathan: Or not so well yeah. It has been a great journey really, but yeah it’s never dull, but it’s the pressure of times.
Ryan: Appreciate your time today.
Jonathan: Thanks Ryan, cheers.