9 Relevant Tips for Commercial Property Investors
The commercial property market has seen some interesting changes and is experiencing a fresh buoyancy as markets worldwide start opening and economies experience recovery. There is a lot of activity with fund managers restructuring their portfolios, clearing out unwanted stock, with sellers doing likewise, and buyers hunting for opportunities at a good price.
We have taken into consideration industry thoughts, international trends and implemented our wealth of knowledge and experience to devise 9 tips that are relevant in the current market climate, for the would-be commercial property investor.
- Timing – Be realistic and deal with the facts at hand. A lot of time and effort is made trying to predict the future directions of the market. Is the definition of an economist being one who can predict the next 3 months cycle with a 30% accuracy rate? The markets cannot be forecasted accurately. Buy what you can afford when you can afford and use the information you have in hand.
- Financing – Understand Interest rate cycles and where we are in the cycle. Stress-test your finance model for acquisition. In South Africa, we are going through an unprecedented low interest-rate cycle. We don’t know how long this will last but we do know that recovery will bring with it inflation. Make sure you can continue financing your property when the cycle changes.
- Partner with a Professional – Economic downturns affect real estate sectors in different ways. It is essential to partner with a professional that has knowledge not only on the real estate of a specific area but also in the actual commercial sectors and their economic patterns.
- Pay Attention to the Market and Watch Migration Patterns – Right now we are experiencing residential migration even in the affordable market from the Inner Cities to suburbs, as well as from large malls to regional centres. E-commerce trends are impacting retail centre layouts and logistics.
- Look at Ways Properties Can be Repurposed – There are interesting trends worldwide in terms of flexibility and re-use, which we have blogged about. We continue to see the shift from office to residential conversion. We are even seeing containers being used for office and residential. Provided the area is viable, look at properties selling at a discount that may have an upside for another purpose.
- Location is Important, watch local property trends – Rezoning for density in areas where there is economic movement is always an opportunity. Look at the demographics of the areas and whether there is financial difficulty or growth.
- Look for Immediate Upside Potential in An Acquisition – Obvious areas to improve your investment return. In other words, a retail centre with a high vacancy rate (say 30%) but solid anchor and support tenants is a buy if the area has been going through a temporary squeeze and the property is on the market priced at the current cap rate based on existing income. (The 30% vacancy rate becomes an immediate opportunity to increase return without development cost as you will simply need to source additional tenants).
- Long-terms Cap – Rate Sustainability, and profitability is important. Don’t make rash decisions. Is the underlying asset worth its asking price and will the asset retain value over time?
- If the Commercial Property Market Makes You Nervous – due to major knocks in recent years, wait for the market to stabilize. The market is not likely to grow at a rapid rate, and the downside (value prices) should remain for some time still.
This article is loosely based on a recent article in Forbes: 15 Tips for Determining the Right Time to Buy Commercial Real Estate. https://www.forbes.com/sites/forbesrealestatecouncil/2020/11/24/15-tips-for-determining-the-right-time-to-buy-commercial-real-estate/?sh=17c018822e04