Commercial real estate is a very appealing investment choice for investors of all sizes and degrees of sophistication, especially in a low interest rate environment.
High levels of transparency and a negative connection with returns from other asset classes are two characteristics that might keep investors interested in commercial real estate over the long run.
However, there are risks to watch out for, just as with every financial asset type. The following six pointers will help you effectively avoid the traps and take use of commercial real estate's best qualities.
A strategic approach to decision-making is essential in order to evaluate and manage aspects related to commercial property investments.
A specified acquisition process should be scrupulously followed before purchase. Better risk-managed purchase decisions will result from this.
When commercial property assets are bought, they should be the focus of an extensive business planning exercise that includes strategic consideration of long-term capex requirements, lease reviews and expiries, and divestiture options.
To maximize the realised value of the property when diversity is taken into account, economic cycles and external influences must be taken into consideration.
1. Consider the long term
Investing in commercial real estate often yields rewards over time. For instance, income increase through annual review procedures in leases, particularly for long-term leases, builds over time.
Additionally, purchase-related transaction costs (such as stamp duty and due diligence fees) are amortized over time and lose importance in a capital sense the longer a property is kept. Through opportunistic purchase and sound management, it is feasible to make short-term gains, but these gains can also add value over time.
2. The importance of income security
The most crucial factor in establishing the investment value of commercial real estate is the value of the income stream.
As a result, the stream of income's quality and security must be evaluated, maintained, managed, and expanded over time. In order to achieve value growth, this is essential.
3. Be ready to take direct control
Commercial real estate is a type of investment asset where proactive, efficient asset management can produce long-term benefits. Reinvestment in the asset is ensured through strategic management and capex plans to be rewarded with stable and increasing income.
4. Understand the impact of the external environment and property cycle
Like returns on most assets, commercial property returns are subject to both internal and external economic cycles.
When making decisions about purchases, significant capital expenditures, and property transactions, commercial property owners should be cautious of cycles and external variables.
It is crucial to avoid having to sell an asset at the wrong stage of the cycle because this can have a significant influence on total returns.
5. Take on debt, but not too much.
Debt that is carefully planned and managed can significantly increase the returns on commercial real estate investments. The regularity of property revenue (used to pay interest and repay the debt) will be one of several variables affecting the degree of appropriate debt.
While debt over the determined appropriate amount may boost profits even more, it also carries an elevated level of risk that needs to be priced.
6. Invest alongside others
An investment in commercial real estate may ask for extremely significant equity money, often in the range of several million dollars.
The commercial property investment market is, however, more accessible to those with less wealth to invest thanks to collective investment vehicles including property syndicates, property investment funds, and listed real estate investment trusts (REITs).