Understanding Commercial Property Investments

Do you ever feel that you should be looking more at investments in commercial property in the saturated residential property market? If this is in your mind, you are joining the new wave of investors who wants to diversify their investment portfolio with the unstable economy.

How big exactly is the commercial property market? Generally speaking, commercial property investment is not as straightforward as residential market. In Malaysia, it is almost sure that any piece of residential property will be lapped up the moment it is launched, and everyone at some point of their life will be looking for a house of their own. Some may buy a piece of residential property and rent it out instead. For commercial properties, there are a lot of other considerations.

1. Location

Location is a very important factor when it comes to investment in commercial properties. It may be true that a lot of people are looking into creating their own business, and it will not be too hard to find someone to rent your property start their business, but if the location is not right, the chances for renting out is slim.

When you wish to invest in a commercial property, look around to see whether there are other residential properties which will support the business. You may want to take a good look at the whole development project, and check residential population surrounding the commercial lot that you are aiming for.

Also, do check if the area is a flooding area, or are there any other disadvantages. Parking space is a very important factor of consideration for any business to thrive in this modern world, and you ought to make sure that there are parking spaces near the property you wish to invest in.

2. Features

Sometimes, the success of commercial properties also comes with the features included in the project itself. For example, some properties may be managed by the developer, with facilities such as wi-fi zone, making the commercial blocks into event venues or even being selective about the types of business and brand name to qualify as tenants. Some commercial properties with such strict criteria about tenants include BM Utama in the mainland Bukit Mertajam, and Straits Quay in Penang island.

Both are project examples of two contrasting backdrop. Straits Quay is a high-end sea facing project by E&O, with very high traffic coming from its branded tenants and expensive condominiums and landed property support. Meanwhile, BM Utama is a 7-unit exclusive commercial lot owned by BM Utama’s property developer, DNP Land, and is meant to become part of the lifestyle support for the almost sold-out BM Utama. The 7 units are called The Gallery, which is available for leasing only, to ensure the quality of retailers.

3. Price

Although people are talking about market price, as an investor, you should take into consideration the price and the size of the property. It is important to note that your property lease are usually based on long term contracts, and for some cases may span for 10 years instead of the normal renewable 1 or 2 years for residential properties. Also, you need to remember that returns from residential property comes from the capital value increase, but for commercial properties, it comes from income. Although commercial properties generally will cost more than residential properties, you will still need to sieve through to see if the investment can really bring you back a good return. Is the rental price of that property able to cover the loan that you took for the purchase?

If you are buying the property for the sake of making it into a hub for your own business, then it is up to you to ensure that the business that you are going to do will bring in enough sales and income to cover for the loan repayment of the property.

Commercial property leases provides an average contracted income stream of about 7 years.

4. Ownership

When you buy any property, you need to be very clear about the type of ownership that you have. Is it a freehold or a leasehold property?

Although leasehold properties are usually released with a certain amount of payment when the expiration term arrives, there may also be conditions where the land is taken back for new development. When the lease-land period is almost reached, property prices will drop significantly.

Residential Or Commercial Property Investment?

Residential property investment has been the primary focus for most property investors in New Zealand as it is an easily understood form of investment, carries with it less risk of vacancies and can be more readily saleable in a depressed market.

For these reasons commercial property investment has been largely overlooked by many investors; even though this class of property can provide you with much greater levels of return than that from a purely residential investment. An immediate benefit to the owner is that commercial tenants pay for outgoings on the building such as insurance, rates, building Warrant of Fitness fees, repairs and maintenance and often management fees.

As a property investor, if you are looking to diversify your residential investments, then commercial property would be the next logical step. However, it is true that residential investors are often wary of entering the commercial property market due in part to their lack of understanding on the driving factors behind commercial investment and perceived risk in re-letting a property should it become vacant.

Vacant commercial properties have certainly suffered more than residential in the past when it comes to finding a tenant and prolonged vacancies can occur. Furthermore, getting a new tenant signed up can be expensive. Agents fees of 13% to 15% of the first years rent, and inducements such as a rent holiday and/or help with fitout costs are often expected.

It is important therefore that you have a lower level of borrowing than you would for residential so that you can ride out any prolonged vacancy. With this in mind, banks typically only loan up to sixty percent of a commercial property’s value anyway.

Commercial property investment has always been focused primarily on location however of equal importance is the associated tenancy that runs with the property as this provides the source of income for the investment.

The strength of a tenants covenant to meet their lease obligations and pay the rent is one of the most important issues in commercial property investment.

Coupled with this the length of lease term is also paramount. Long term leases (six to ten years plus renewals) are very sought after as they give you, the property investor, a much reduced risk profile of having an empty building, particularly when a sound tenant covenant is also provided.

Other important factors you should consider include location to ensure the building is well positioned to local service centres, is accessible to main roads or motorway systems and can ideally benefit from visibility and profile to passing traffic. As a landlord, you must ask, could the building be re-let easily and efficiently should the existing tenant vacate?

Buildings should ideally be adaptable for a range of alternate uses to meet future tenant requirements. Specialised property lack this attribute and are therefore more at risk of long term vacancy if a tenant is lost.

Multi-tenancy premises are well sought after by investors as they provide a good spread of income and reduced risk associated with having any vacant space compared to a single tenanted building. However, they do carry with them more management issues.

Any property investment should be viewed as a long term strategy and as a commercial investor you will find that over time you will have seen rents rise significantly more than a similar residential investment. When economic times are good, rapid increases in rental levels have been seen. With most lease agreements providing for two yearly rent reviews, this can lead to a significantly higher rent roll and value of the property over time.

The current low interest rate environment has meant that positive returns on commercial investment are now being enjoyed where the costs of borrowing may be say 6.5% whereas the return on the commercial property investment could be around 9.0% to 10%. This additional margin of 3.5% is likely to attract greater interest in commercial property.

Having a long term view on any property investment is important as there will certainly be some downward fluctuations in value when economic times are hard such as now. However, in the long run property investment has historically given some of the best results out of any investment strategy.

Commercial Property Investment

A lot has been written about residential property investments but the areas of commercial real estate investments are not very familiar with most of us. A large number of investors are more at ease with investing in residential property as they are familiar and comfortable with it. Commercial property, on the other hand, is not as well known. If you do not deal with the day-to-day matters of running a business from a commercial building, which most people are unfamiliar, specially the terms and conditions of commercial leases and the tax implications. I am writing this article to provide readers with a brief and short knowledge of commercial property investment and their advantages.

Commercial property is office spaces, retail units, and industrial factory sites, warehouses and manufacturing industrial sheds. The investment procedure and returns are quite different to the conventional residential.

Return & Risks

The risks low and also the returns are also low in the residential property; however the commercial property has a higher return with a higher risk. In India the commercial and industrial market vary from place to place, but if one takes an overall analysis of commercials returns compared to residential returns, the difference is strikingly poles apart. Leasing out a commercial property compared to a residential is different, a commercial space may take some time to be leased out, however a residential just may take a few days or a weak to be leased out.

Leases Period

Residential leases tend to be for six or 12 months, which is a shorter period. However, a commercial property is leases out for a longer period of time may be about six to ten years with an escalation of rentals ranging from 15 to 20% annually. It is not uncommon to have leases that are for an initial five-year period, with the option to

renew for another five years.

Quality of tenant

The tenant is obviously a crucial and important part of your property. In commercial property, a large corporate tenant occupier is considered a ‘blue chip’ tenant. They are likely to rent your property for a long period of time and are unlikely to default on the rent.

Investment Ratio

Buying commercial property is often much more expensive than buying residential property. Office or retail space is generally the most expensive space, due to its location and the class it commands. Industrial property on the outskirts of the city can also be expensive due to size of the property being purchased. Costs, however, can minimised by purchasing smaller premises.

Fixed Costs:

A commercial or a residential property has an operational cost involved when still pending to be leased out; the cost differs depending on the type of property one has invested.

Benefits of a commercial investment:

One of the main advantages of being an owner of commercial property is that once you have a potential blue chip corporate as a tenant you have the benefit to flip your property with a larger margin, where you would find ready buyer offering you the rich premiums, your pockets swell bigger and bigger, even though you have been milking the cow for over so many years. This is not the case in residential investments.

Commercial Property Investment Values Remain Stable

Investing in real estate has generally been considered as a relatively safe and profitable venture. Over the past few years however, the housing market has proven it is not immune to volatile ups and downs nor it has been safe from speculators and scheming fraudsters. Fortunately, during the same time, commercial properties have largely escaped the chaos and ruin that the residential market has experienced.

In fact, a recent study by Deloitte Consulting LLP, a subsidiary of the financial accounting firm Deloitte & Touche USA LLP, found many reasons to believe that commercial values are fairly consistent, making them a great real estate investment choice.

“In prior boom cycles, commercial real estate has responded by overbuilding. The industry has clearly learned its lesson because this time commercial real estate is enduring a credit crunch – not a crisis – partially because it resisted this urge. No doubt, the industry is in a strong position to withstand a recession, should one occur, and commercial real estate remains a viable investment option for those seeking to diversify and insulate their portfolios from market volatility,” said Dennis Yeskey of Deloitte’s real estate capital markets practice, as quoted in a press release on the company’s website. “Capital flow will return in 2008, with the exception of highly leveraged deals, and new opportunities are being sought in distressed debt funds, niche opportunities, and global markets.”

The “Real Estate Capital Markets Top Ten Issues – 2008” study found that although profits have been skimmed as the residential market has failed, commercial property investment values have held steady in many places, and have seen modest growth in others.

Plus, the surveys detailed, because of the shakeup in the housing market, mortgage underwriting rules that were also becoming too loose in the business world are now being examined and revised. The result is that investment loans will be safer, with less risk of fraud.

Another finding is that investment values have been strong in the office and industrial segment of this market, making them a much better investment at this time than retail properties or multi-family dwellings.

Additionally, funding for commercial property investment is much more readily available today than it is for residential real estate purchases. Of course, large down payments are still required as well as well-documented sources of income and assets, but the study found that lenders approve conservative commercial property investment loans quite often.

While some shifting of prices and expectations still need to take place, the study concluded that commercial market values have shown good stability and potential for pretty profits.

Going forward the study said, “Investors would do well to stop comparing CRE (commercial real estate) returns to the previous few years’ performance, and to take a closer look at how these returns fit into the bigger picture. Returns will probably be lower, but when compared to other investment categories (stocks, bonds, etc.), CRE remains an attractive investment vehicle due to its stability and opportunity for diversification.”

Tips For Commercial Property Investment Mortgages

ommercial property investment is different from the residential one. Today, there are plenty of commercial investment mortgage options available. They help you in buying commercial properties. At a smaller level, it might be a warehouse or office space. At a bigger level, it might be a mall or a multiplex.

Commercial property investment is generally made to rent out for business reasons. Prior to buying a property you must ascertain the quality of users you are looking for. It might have to do with area credit history record, needs of the borrower and his payment capabilities.

People might have a single investment in mind. They might also be looking for a portfolio of sorts. In both cases, loans are easily accessible. If you show your worth and neat intentions, you will be able to get Government Grants as well. Such grants are not easy to procure. You have to wade through a lot of red-tape. But if you present your profile well and the grant is being administered then you can even fetch millions from government. It is important to note that government is entitled to hold different audits and periodic assessments for finding out the progress you are making.

An authentic and smart commercial mortgage company would provide you with the right kind of lender. It will also post your entire presentation to him so that he can see your plans clearly and provides you a formal sanction. It would also teach you the basic of insurance and minimal cover. The commercial investment property mortgage companies arrange the most competitive deals for you so that you get your infrastructure cost minimized.