Commercial real estate has always been considered a good investment because the value of the asset always increases over a long period whether the market goes up or down or trends change.
In the past, most investors in commercial real estate were institutions such as insurance companies and listed companies. However, in recent years, more and more private investors have seen opportunities to grow their property portfolios. Thus, many have taken the plunge as sole acquirers, while others have acquired commercial property in cooperative societies or groups.
Residential vs Commercial
Investing in commercial real estate is not the same as buying a house or even a residential apartment building. This is a purely business decision, and when considering any commercial real estate investment, there are several factors to consider before making a commitment.
- Income risk tends to be lower in commercial real estate and leases are generally longer, which helps stabilize cash flow.
- If you need financing, keep in mind that most banks will not finance more than 75% of the purchase price of a commercial property. This means that you will need a down payment of at least 25% of the purchase price, which is significantly higher than that required for a home loan.
- Loan repayment times are also significantly shorter than for home loans. Most banks require mortgages on commercial properties to be fully paid off within five to seven years, compared to 20 to 30 years for home loans.
Return on investment
Over the long term, well-chosen commercial properties can offer higher returns than residential properties. The first step is to decide what type of property you want to own.
According to the FNB Commercial Property Broker Survey for the third quarter of 2021, industrial property and warehouse brokers reported the highest level of activity. The retail sector’s activity score also strengthened for the fifth consecutive quarter, while offices posted the lowest score of the three major commercial real estate sectors.
Whichever category of commercial property you choose, you must carry out rigorous due diligence to establish the assets of the property and assess its commercial potential.
To ensure the success of your investment, it must be adapted to the needs of the tenants you wish to attract.
Check with planning to ensure there are no major changes to the store, such as proposed developments nearby, that could affect your purchase decision.
Be aware of overlay zones, which replace regular zoning regulations. An overlay zone is a zoning category that applies to a lot or property unit in addition to the base zoning. It stipulates additional development parameters or use rights that may be more or less restrictive than the basic zoning. It may also include layout provisions and parameters relating to environmental protection.
Find out if there are any environmental concerns, such as extreme air pollution or declaring the area a reserve for the protection of a particular creature or plant. Decide if this could negatively affect your ability to rent the premises.
Ask the following questions:
- What are the traffic patterns in the area?
- Is the property highly visible from major highways in the area?
- Is there sufficient foot traffic for future tenants, whose success may depend on it?
- Is the area safe for guests and employees traveling to and from the property?
- Will tenant employees be able to easily access the premises?
- Is there adequate public transport in the area for staff and clients?
- Does the property have enough parking?
- If your tenants are causing noise, pollution or traffic jams, could this lead to complaints from neighboring businesses or properties?
Before investing in commercial property, you should assess all possible risk factors.
- In a building with only one tenant, you could live for several months without rental income if the tenant does not renew the contract at the end of the rental period. You will still need to service your bond and pay municipal rates and services.
- With multiple tenants in an assortment of businesses, you need to be reasonably sure that only one or two units will become vacant simultaneously.
- Ideally, you should set aside sufficient funds to cover occasional vacations as well as upkeep.
- Diversifying your investments will help you weather most economic downturns.
Although investing in commercial real estate may seem daunting to a novice, the obstacles are not insurmountable. With a reliable commercial real estate broker to guide you in your selection, the experience can be extremely rewarding.
Before investing, however, it is advisable to be patient and wait for the right property to become available.