For many years, commercial property investment was almost entirely limited to institutional investors. These days, however, more and more private investors are recognising the potential of the commercial sector.
“The higher deposit requirements due to banks only offering around 60 to 70% bonds on commercial properties, can seem a steep point of entry for individual private investors,” says Alisdair Crofton, franchisee of Rawson Cape Town CBD Commercial. “But that doesn’t mean commercial property has to be off the table. A lot of investors are forming cooperative companies or investment groups to boost their collective buying power in order to diversify their property portfolios with a commercial component.”
The appeal of commercial property is easy to see. According to Crofton, commercial property returns can be 5% to 8% higher than residential property, while risks are lower thanks to the longer commercial lease terms and the significant hassle involved in moving an established business to a new premises.
“Well-chosen commercial properties often benefit from stronger appreciation as well,” Crofton adds, “particularly in areas undergoing active development and infrastructure improvements.”
Where to start as a new commercial property investor?
So how do go about getting a foot into commercial property investment?
Crofton says the first step is to familiarise yourself with market trends and opportunities.
“Popular commercial property types include office and co-working spaces, retail, industrial, hospitality and even retirement communities,” he says. “Knowing which types are doing well, what areas are up and coming, and where there might be gaps or opportunities makes it much easier to narrow down which properties you might be interested in.”
Working with a capable commercial broker can also help solidify your investment strategy, before lining up potential options to investigate more thoroughly.
Risks to be aware of
Commercial properties can be less risky than their residential counterparts, but Crofton says there are still a number of potential pitfalls – and risk mitigation strategies – to be aware of going in.
“Choosing to rely on a single tenant, for example, can be a risky decision, leading to zero income for several months if that tenant decides not to renew,” he says. “It’s far less risky – although potentially more expensive – to invest in a property that can house multiple tenants in a variety of industries. That way, even if one or two don’t renew their leases, you still have cashflow from the others.”
Cashflow is vital for commercial property owners with bonds, rates, municipal services and maintenance expenses to pay. To prevent liquidity issues, Crofton highly advises investors to prioritise the creation of an emergency fund to cover occasional vacancies and unexpected maintenance costs.
What to consider when assessing a property?
Once you’ve found a potential property, Crofton says it’s time to do some digging.
“The first thing to do is check with town planning to confirm zoning and make sure your intended use is permitted,” he says. “You should also confirm whether any overlay zones apply, as these supersede zoning conditions and could make an otherwise perfect property unsuitable for use.”
If there are no zoning red flags, Crofton says it’s time to put yourself in your intended tenant’s shoes to figure out how well a real business might perform in the space in question.
“In commercial property, your tenant’s success is your success,” he says. “That makes it vital for investors to consider all elements that could influence their potential tenants’ ability to thrive.”
Things like traffic, foot traffic, parking, public transport access, local security and even neighbouring businesses can all be pivotal, depending on the type of commercial tenants you hope to attract. Any environmental issues like extreme pollution or environmental protections should also be investigated, as they could impact on the property’s use as well.
“Having a professional commercial broker on your team can make a big difference in this process,” says Crofton. “We can often provide insights that aren’t obvious from the outside, and connect investors with information that may not be easily accessible. This enables more informed decision-making, helping our investors capitalise on opportunities and avoid nasty surprises down the line.”
READ: 7 mistakes to avoid when signing a commercial lease
In an article published in May 2023, High Street Auctions Director Greg Dart, said it’s crucial for landlords to invest wisely; prioritising digital systems that significantly improve the work environment or provide long-term cost benefits.
Dart, who has specialised in commercial real estate for more than a decade, has a landlords’ shortlist of technology investments that will attract the right tenants and maximise rental revenue.
The top tips:
Connectivity
“Top of the list is installing convenient plug-and-play infrastructure for high-speed internet access, which tenants demand from Day 1 in new premises.
“With every business now relying on cloud-based services and video conferencing, high-speed internet is a competitive necessity.
“Offering fast and reliable connectivity that’s available in every space in the building isn’t an optional expense for landlords anymore and the lack of it will show in vacancy rates.”
Energy
Dart says there are two aspects landlords should consider – renewables and intuitive smart systems.
“With the ongoing Eskom crisis, a huge selling point is offering renewable energy technology that keeps offices operational during load-shedding.
“Renewables also help reduce costs and carbon footprint, and appeal to tenants who are environmentally conscious by choice or corporate policy.
“Solar panels, wind turbines and geothermal systems are all examples of renewable energy technologies that can be used to power commercial buildings and offer uninterrupted power supplies.”
Certain smart, intuitive energy systems can also cut costs for landlords and tenants, one of the most beneficial being motion-activated lighting.
Security
Dart says advanced security systems are essential investments in high-crime countries like South Africa.
“They keep assets safe for both landlords and tenants, which is especially important for businesses that handle sensitive data.
“Good investments for landlords include access control systems, surveillance cameras with off-site back-up, perimeter security and intrusion detection systems.”
READ: Essential security tips for estate and complex owners to keep in mind
Smart Buildings
Dart says if landlords have covered the top three on the list, another investment they should consider is smart building technology.
“Smart building systems can help landlords manage their properties more efficiently and effectively, reducing operating costs while improving the tenant experience.
“For example, installing climate control systems can help landlords cut energy costs; at the same time providing tenants with greater control over their workspace.
“Another aspect is offering online portals for tenant management. Online portals allow tenants to pay rent, report maintenance issues, and communicate with the landlord or property manager, all from the convenience of their computer or smartphone.
“This can save landlords time and resources, while also improving tenant satisfaction.”
Dart says in the post-Covid market with office vacancies still high, commercial property tenants are spoilt for choice.
“By making the right technology investments, landlords can future-proof their properties and stay ahead of the competition. This short-term expenditure will pay off handsomely in long-term revenue gains.”
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