Beginner’s guide to investing in commercial property

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.”