How to Invest In Commercial Property

The global economic downturn forced many investors to reconsider the way they manage their investment portfolio. Just a few years ago investing in residential property was the preferred choice of many investors and financial advisors, but currently the residential property market is struggling to gain momentum and remain on a stable and consistent growth path. As an individual investor you might be wondering whether you should consider moving your money to the commercial property market. However, the market for commercial property is somewhat different to the residential property market and you should do you homework before embarking on a commercial property shopping spree. But first: How does a commercial property differ from a residential property? The commercial property market can broadly be divided into retail property, office space and industrial property while residential property is used by people for living purposes – no business is involved. One of the most important things to note when investing in commercial property is that the investment is much more dependent on its income stream than residential property investment as commercial properties generally do not experience the same level of capital growth. The complexity of investing in commercial property is one of the reasons why individual investors are often reluctant to participate in this market. Therefore: Make sure you understand what it is all about. It is extremely important to check that a lease agreement for the property is in place before you invest your money in it. This will insure a continuous income stream. Investing in these properties can be a risky affair and you should be aware of all the pitfalls. If a new shopping centre is to be built across the road from your commercial property, you will most likely find yourself without an income – resulting in a bad investment. You will probably also need a large amount of money as these properties are usually more expensive than residential property. However, the lease agreements are generally for longer periods of time and because tenants use the property for business, they will usually look after it quite well as customers and potential clients will visit the premises and associate the place with their brand, service and products. A recent report by the property services company Broll suggest that the commercial property market in South Africa is also under strain. In an international context however, South Africa was one of only a handful of countries to show positive property returns in 2009. The company predicts that the market for office space will be the last to recover from the downturn. According to the company, owners of office space have started using incentives like lower rental rates to try and keep their tenants. Some role-players suggest that the retail property market has the most potential as this market is backed by the improvement in consumer confidence as a result of lower interest rates, better trading conditions and lower levels of debt. Others are not as positive as the impact of the recession is still quite visible in economic conditions. While the commercial property market might offer good value, it is extremely important to educate yourself about all the developments around the market and make sure that the market value of your investment is realistic.