INVESTING IN COMMERCIAL PROPERTY
Commercial property is real estate that is used for business activities. Commercial property usually refers to buildings that house businesses but can also refer to land used to generate a profit. As its name implies, commercial real estate is used in commerce. This broad category of real estate can include everything from a single storefront to a huge shopping center.
Commercial real estate includes several categories, such as retailers of all kinds, office space, hotels and resorts, strip malls, restaurants, and healthcare facilities. The performance of commercial property including sale prices, new building rates, and occupancy rates is often used as a measure for business activity in a given region or economy.
WHY INVEST IN COMMERCIAL PROPERTIES?
Commercial property has traditionally been a sound investment. Initial investment costs for the building and costs associated with customization for tenants are higher than residential real estate. However, overall returns can be higher, and some common headaches that come with residential tenants aren't present when dealing with a company and clear leases.
Commercial properties also tend to benefit from more straightforward pricing. A residential property investor must to look at several factors, including the emotional appeal of a property to prospective tenants. In contrast, a commercial property investor can rely on the income statement that shows the value of current leases, which can then be compared against the capitalization rate of other commercial property in the area.
Investing in commercial real estate can be lucrative and serve as a hedge against the volatility of the stock market. Investors can make money through property appreciation when they sell, but most returns come from tenant rents.
Investors can use direct investment where they become landlords through the ownership of the physical property. People best suited for direct investment in commercial real estate are those who either have a considerable amount of knowledge about the industry or who can employ firms who do. Commercial properties are a high-risk, high-reward real estate investment. Such an investor is likely to be a high-net-worth individual since commercial real estate investing requires a considerable amount of capital.
Alternatively, investors may invest in the commercial market indirectly through the ownership of various market securities, such as real estate investment trusts or exchange traded funds that invest in commercial property-related stocks, or by investing in companies that cater to the commercial real estate market.
ADVANTAGES OF INVESTING IN COMMERCIAL REAL ESTATE
One of the biggest advantages of commercial real estate is attractive leasing rates. In areas where the amount of new construction is either limited by land or law, commercial real estate can have impressive returns and considerable monthly cash flows. Industrial buildings generally rent at a lower rate, though they also have lower overhead costs compared to an office tower.
Commercial real estate also benefits from comparably longer lease contracts with tenants than residential real estate. This long lease length gives the commercial real estate holder a considerable amount of cash flow stability, as long as long-term tenants occupy the building.
In addition to offering a stable, rich source of income, commercial real estate offers the potential for capital appreciation, as long as the property is well-maintained and kept up to date, and like all forms of real estate, it is a distinct asset class that can provide an effective diversification option to a balanced portfolio.
DISADVANTAGES
Amongst a few, one downside of commercial real estate investment is that for those looking to invest directly, buying a commercial property is a much more costly proposition than a residential property. Moreover, while real estate in general is among the more illiquid of asset classes, transactions for commercial buildings tend to move especially slowly.
It's not uncommon for commercial properties to have long vacancies, which means that an investor will need to cover all the costs during this period. Commercial property can sit vacant for a few months whilst waiting for the right tenants and for anyone that lives close to a "High Street" of shops, you will probably have witnessed both ends of the scale, with successful businesses leasing for years and alternatively shop fronts that are frequently empty because they just can't seem to get the right long term tenants. An investor will then need to be prepared and have a cash buffer available to cover a property's outgoings without the support of rent.
Commercial property is more susceptible to economic shock. Demand for business goods and service can fluctuate dramatically based on the strength of the economy. Demand for commercial premises usually falls during an economic downturn, but people always need a place to live. In addition, as the pool of tenants is smaller new property coming on the market in the same area can reduce your pool further and even existing tenants may look to upgrade or expand. Changes in infrastructure can be positive and negative, improved infrastructure can attract tenants to the area, but it can also lure tenants from existing areas if other areas are benefitting from roads, transport or other major upgrades.
KEYNOTE:
Investing in commercial property can mean significant rewards with high rental returns and longer tenancy periods. However, it is advisable that an investor should get financial and legal advice along the commercial property investment journey. Just like any other investments out there, a robust due diligence analysis must be completed before negotiating for the property.