How to invest in commercial property

Private Property South Africa
Tahir Desai

Rather like taking the highest slide or fastest ride at an amusement park there is something a little addictive about investing in the commercial sector. Yes, the risks are higher. So too are the rewards. While property is usually a good long term investment, commercial property – though still a long term thing – can roll far more zeros than most residential investments can ever offer.

And zeros we like. There aren’t that many things that the Other Half and I agree on but this is certainly one of them. And when there is agreement for the taking, I do all I can to encourage it, especially of course when zeros are involved.

So, with friends talking about the real world of commercial investment, and us up for a little dabbling, it was clearly time to get more knowledgeable about the situ. Whether it’s a warehouse, a shopping centre, an office block or a corner café, commercial property certainly has its temptations.

Why commercial property?

  • The right commercial property can produce far greater returns than any residential property.

  • Commercial property has long-term lease contracts and fixed escalation rates, which directly contribute to the increase in value of the property.

  • It is easier to get a bond on commercial property as it is financed on the value and returns of the property and the lease contract, unlike residential property where a bond is determined by the buyer’s income.

  • Commercial property has a 10-year bond period, which means the investment comes to maturity much sooner than a residential investment.

  • Commercial property can be refinanced to release equity if suitable lease agreements are in place.

  • Commercial property owners can negotiate triple net leases where the tenant is responsible for all maintenance to the property.

Tips for investing in commercial property

  • Get expert advice on the market you are investing in - including the general state of the economy and the market dynamics, as well as the benefits and risks of each specific property.

  • Vacancy is the single biggest risk in commercial property investment. Limit this by choosing a property with multiple units (and hence multiple tenants) as opposed to a single large unit.

  • Don’t over extend yourself – keep some capital in reserve for contingencies such as vacancies, leasing commission and new tenant fit-out costs.

  • Financiers consider security, repayment ability and risk before granting a bond. Consider for yourself the same issues so that you make informed decisions.

  • Assess, with the help of a specialist, whether there are expansion or redevelopment possibilities for the property and whether there is market demand.

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