7 factors for successful commercial investment
The landscape of real estate commercial investments is fast changing. It is about making a timely decision as those who adapt, will prevail. When you think of successful commercial investments three options spring to mind: shops in malls, corporate offices or plazas.
However, as opposed to residential real estate, where two adjacent buildings would show similar risk, commercial real estate risk varies. The risks associated with two commercial buildings in a similar location would fluctuate independently. Today, I would like to discuss about a few common factors which will play a vital role in the your commercial investment success.
No matter which investment you are looking at, you must make sure that the location is premium. Even if not right now, but it must have a great potential in future. No matter where you invest, if it is not a premium mall, office building or a plaza in a premium location, your investment will suffer.
- How much vehicular traffic is there in the area?
- How much foot traffic is there in the area?
- Can your building be easily seen, or will patrons have to search for it?
2. Rental Valuation
A successful commercial investment should give you at least 5 to 7% of rental income per annum on its own. Rentals are the mother of any commercial investment. In case of managed commercial rentals such as malls and offices, make sure you do not get fooled by the guaranteed rental prospect. Usually this is limited to a couple of years and unless it is at least 5 years, it does not make a huge difference. It is best to evaluate yourself what your tenants will be willing to pay.
If you are renting it out, it is important to know which kinds of tenants your property will attract. High end tenants, banks, big retail brands, corporate offices add value to your commercial space. They are also the best pay masters with longer leases and they hardly ever default. Any commercial space which is going to attract only lower or mid class tenants, will be classified as such and lose value over time. Also these are likely to result in some defaults and tenancy issues which will reduce your rental income manifolds.
The following things will help you understand the neighborhood for a successful commercial investment:
- Household income
- Spending patterns
Use this information to analyze whether your property is a good fit for a neighborhood and surrounding areas. “For example, a food wholesaler might seem like a good fit for any neighborhood, but a lower-middle class population may not be able to afford buying in bulk.”
5. Town planning
When planning commercial spaces, town planners make sure that all necessary commercial activities should develop and endeavor to sustain the neighborhood. This will include low to high end commercial activities, dedicated areas for malls and corporate offices. While this information is useful, most of the times it can be misread or in terms of independent commercials left to the market to decide their fate.
Over time things will develop the way town planners have envisioned. The price of commercial spaces which were similar at the beginning will slowly drift apart. This happens as more centralized areas start to attract high end tenants, while others cater to middle and low end commercial activities.
If you look at DHA Lahore as an example, Phase 1 H block, K block or Phase 2, Q & T block were not able to develop as Phase 3 Y and Z block or CCA of Phase 5. Similarly future trends also effect the market, just look at how Phase 3, Y and Z block commercial are loosing traction because of the upcoming Goldcrest Mall.
In areas where trend is not yet established, the risk may be greater. It is therefore vital to catch up to the trend in its infancy stage or else you will not be able to capitalize on the huge capital gains.
While a certain premium could be attributed to the presence of amenities in a commercial space, its benefits tend to override the cost. Availability of car parking should be in proportion with the quantum of space, requirement of tenants and footfall. Dedicated parking spaces is a must have in a corporate or a high end retail area. Simple rule of thumb is, the more the merrier.
Presence of amenities, say a food court / essential retail in a building complex would certainly enhance marketability of the space, and it would be a good idea to invest in such options.
Summing up successful commercial investment
While investing in commercial real estate certainly enhances one’s overall investment portfolio, the decision must be made after a thorough market research whilst taking into consideration the above-mentioned factors. It is always advisable to take the help of a professional real estate consultant in the process. Even if this process ends up taking more time, it will be absolutely worthwhile.
Remember, everything takes longer with commercial real estate, including construction, finding new tenants and “due diligence is months instead of days.” The flip side? The leases are longer and gains are much higher as well. You just have to keep your patience.
Captain (Retd) Shahnawaz Yaqub Bhatti
Investment Consultant and CEO at Imlaak
Mob : +92 333 1616160 ( WhatsApp)
Captain Shahnawaz Bhatti (Retd) is the founder and CEO of Imlaak which is based in DHA Lahore. He has represented a large number of investors in a wide array of real estate transactions. With more then 8 years experience in commercial real estate, marketing and real estate project management, he has a proven track record of guiding national and multi-national clients with their real estate portfolios and asset management. He is also an active real estate blogger and offers free advice through his articles. Imlaak handles real estate transactions valued at well over 9000 million every year. Our specific area of expertise includes strategic planning , transaction management, asset trading, partnerships & venture capitalist with experienced business owners, entrepreneurs, inventors & some proven-concept start-ups. In a very short time, Imlaak has introduced a new vision of professionalism, transparency and hard work in the real estate industry. ‘There is no better time to invest in real estate than today’ Captain S. Bhatti