There are many great reasons to invest in commercial property. For starters, commercial properties typically provide a better return than residential properties and — thanks to various factors — there are often fewer risks for owners of commercial properties than for residential property investors.
Long-term commercial property investors also get the opportunity to leverage their current assets to further enhance their portfolios. Like any other investment, commercial property investment requires in-depth knowledge and expert advice. Join Seeff as we take a closer look at commercial property investments.
First things first: defining commercial real estate
Investors often make the distinction between commercial and residential real estate, but the classification needs to be taken further. Investing in “commercial real estate” means capitalising on one or more of an array of opportunities. From office space, retail (think shopping malls) and industrial (think factories and warehouses) to hospitality (think hotels and guesthouses), there is a multitude of opportunities. So, why do people invest in commercial property?
Higher earning potential and the convenience factor
A commercial property — which could be a retail building, office complex, industrial building or warehouse — gives you much higher earning potential than a residential investment. Over and above this, it can be a far more convenient type of investment, because most commercial tenants head home after business hours. This means less chance of late-night phone calls about something that has gone wrong.
The advantages of dealing with professional entities rather than individuals
Another of the many advantages of commercial real estate is that looking after your property is in your tenant’s best interest. Given that your tenant is a business, moving premises would mean a massive disruption for them. This motivates business owners to be good tenants and — since they are business-minded people — they are likely to conduct themselves professionally.
When you make your first commercial property investment, you’ll quickly learn that the relationship between commercial property owners and their tenants — especially if managed by a proactive property practitioner — can be particularly straightforward.
Over and above this, if your tenant is backed by a larger company, they are even more likely to respect the rules and take good care of your property.
The scale of investment and duration of leases
While every investor must choose between residential and commercial property for themselves, the sheer size of commercial properties (and the potential number of tenants per property) creates appeal in terms of a more steady and consistent flow of income. Also, the longer duration of commercial leases (when compared to residential leases) means that as a commercial landlord, you won’t need to deal with tenants who change fairly regularly.
While a residential lease is typically signed for a 12-month duration, commercial leases typically start from three to five years — even going up to 10 years. This means less admin and more stable income for commercial property investors.
Focus on value and future income
When you invest in a home that you’re going to live in, there is an unavoidable emotional side to the transaction. Even when purchasing residential property as a buy-to-let investment, you’re likely to offer slightly more if you think there’s a risk of losing the house. With commercial real estate, on the other hand, capitalisation rates and future incomes are the sole focuses.
If you’re starting out as a commercial property investor, the most important thing is to make sure you’ve got an advisor who has the required knowledge and experience — and who has your best interests at heart. The Seeff team has decades of experience in helping South Africans grow their wealth through bricks and mortar. Get in touch today and let’s talk about your current or future commercial property portfolio.
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