Ready to invest in real estate? Seeff unpacks the 4 types of real estate and shares how you can make a smart investment.
Real estate investment is for anyone with the financial means to do it. If you have the cash to spend and you want to supplement your income, investing in property can be a wise move.
In a nutshell, “real estate” is all about the tangible and intangible elements of land and property. As you will see, real estate also consists of many different categories and sub-categories (which often overlap, too).
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1: Agricultural Real Estate
Agricultural real estate - otherwise known as farmland - refers to rural land used for farming.
If you own agricultural land and earn a profit from it, then it can fall under commercial agricultural real estate. According to the 2017 Census of Commercial Agriculture, there are 40,122 commercial farms in South Africa.
Here are 2 things you need to know:
- Agricultural real estate is for more than farming and harvesting crops. You can utilise this rural land for forestry, raising livestock, or even wildlife conservation. Based on data from the 2017 Census of Commercial Agriculture, livestock and animal products constitute 52% of farming income in South Africa.
- There are 3 classes of agricultural land: arable, permanent cropland, and permanent grassland.
- Arable land is for growing crops, as opposed to raising livestock or growing fruit and vegetables.
- Permanent cropland is land used to grow crops that don’t require harvesting every year.
- Permanent grassland is an area where grasses (of which there are many kinds) take up most of the vegetation. Permanent grassland is primarily used as grazeland for cattle.
2: Industrial Real Estate
While agricultural land might appeal to you because of stunning views and remote locations, real estate used for industrial purposes isn’t as attractive for industrial purposes. The word “industrial” alone conjures up images of smog-breathing factories, grey cement, and precarious structures stretching up to a polluted sky.
And yet, since the Industrial Revolution, industrial property has been vital to economic growth. Everything in your home can be traced back to an industrial building. For this reason, you can be sure that industrial property is here to stay.
Seeff shares a few things you should know about industrial real estate:
- There are 3 main classes: Manufacturing, storage and distribution, and flex space. You can break that down further into the different types of industrial buildings. These include:
- Cold-storage facilities: For storing foods such as ice cream or other perishables.
- Bulk warehouses: These support e-commerce stores by manufacturing, storing, and distributing products. After all, when you order online from Takealot.com, and even Woolworths, where do you think your items come from?
- Flex buildings: These serve various purposes under one roof; for example, office space and a warehouse, a showroom or a warehouse where you create the product and sell it in the same building.
- Data housing centres: These are custom-built industrial properties that store and process vast amounts of data. They are integral to technology companies’ operations. Common elements of a data housing centre include firewalls, routers, and servers.
The COVID-19 pandemic forced many businesses to pivot online, which saw a significant increase in e-commerce sales. Consequently, this increased demand for industrial real estate - companies needed more buildings to manufacture, store, and distribute their products directly to customers whenever they might be.
3: Commercial Real Estate
Commercial real estate refers to property or land that is used to generate profit. This profit can come from a commercial building, such as when you lease stores within a mall to various retailers. Or, it could come from a plot of land that yields crops and, as a result, generates profit.
Here are 2 things you need to know about commercial property:
- There are many different types, including industrial complexes, retail stores and malls, office buildings, raw land, and big apartment blocks.
- Consider retail, for example. Grocery stores, convenience stores, chain stores, pharmacies, and speciality stores fall under the retail category. Why? Because they generate a profit by selling (relatively small quantities) directly to the consumer.
The impact of COVID-19 badly bruised the commercial real estate industry. Dan Dokovic, the co-founder of a leading commercial real estate firm, estimates that the industry will feel these effects for a while and that some commercial real estate sectors will fare better than others. For example, hotels and notable use buildings (like amusement parks) are not likely to see good profits for some time.
4: Residential Real Estate
“Residential” refers to property or land built for residents. Its function is to accommodate people, and the property itself will consist of four or fewer units. If it’s more than four, it is considered commercial real estate.
Seeff unpacks 2 important things to consider about residential property:
- There are different building types. Bungalows, cottages, single-family houses, cabins, townhouses, and small apartments are all examples of residential homes. So are tree houses!
- Residential real estate is not necessarily property with a house on it. It can also refer to vacant land that has been zoned specifically for housing.
So, when it comes to investing in residential real estate, do not assume you’re investing in an already-constructed building.
Investing In Real Estate
Why should you invest in property or land? Steady, passive income. So if you’ve done your research, analysed the market, consulted an expert, and everything aligns, then investing might be an intelligent choice.
But what type of real estate makes the best investment? Seeff breaks down a few pros and cons for each class:
The Pros And Cons Of Investing In Agricultural Real Estate
- Versatility. You can farm various foods or build on the land as long as zoning regulations allow it.
- The value of raw land never depreciates.
- The location could be an issue. If you invest in agricultural land, consider the water source and whether the location is close to informal settlements (if so, it will be hard to sell).
The Pros And Cons Of Investing In Industrial Real Estate
- Long-term leases and with tenants who aren’t likely to leave on short notice. This provides steady cash flow for you.
- Low maintenance; any major construction or redesign is usually covered by the tenant, too.
- The rise of e-commerce has also increased demand for industrial property. The latest Adobe Digital Economy Index predicts that global e-commerce sales will grow to $4.2 trillion in 2021; therefore, industrial buildings are necessary to meet customer demand.
- Only one tenant. And if they do vacate, you could experience an indefinite period of no cash until you find someone else to fill the property.
The Pros And Cons Of Investing In Commercial Real Estate
- Potential for higher returns, as rent is higher and you can have multiple tenants with longer leases.
- Commercial property is usually privately owned, too, which is why the industry remains relatively stable during economic challenges like inflation.
- Investing in commercial property requires you to pay close attention to what the economy’s doing. COVID-19 has hurt the hospitality industry, so investing in a hotel wouldn’t be wise. That said, profits also vary depending on the sector; do your research.
- Management, maintenance, utilities, and security cost a lot of time and money. Factor these in no matter how many tenants you have.
- The bigger the commercial property, the more people will use it (think of a shopping mall and the damages that it might incur).
The Pros And Cons Of Investing In Residential Real Estate
- People will always need houses. The key is to know which housing types are currently popular - for example, are people buying apartments at the moment, or are they looking for bigger family-sized homes?
- Tenants who decide to leave on short notice or fall behind on rent.
- Short leases.
- High maintenance costs beyond your control (for example, plumbing problems or other obstacles that make the home unsuitable for living).
Contact Seeff today to learn more about our commercial, industrial, residential and agricultural properties available.