UNDERSTAND YOUR RISKS ON A COMMERCIAL PROPERTY
“A well-researched commercial property investment can be very lucrative and may require little attention for some time once it’s tenanted”, explains Rainer Stenzhorn of In2assets, the South African commercial property company. However, awareness of the risks will enable an investor to be prepared for adverse circumstances.
Risks that a commercial investor should to be aware of:
Long-term leases of 3–5 years or more can have advantages, but it takes longer to find a tenant if the property becomes vacant. Prolonged periods of vacancy are common and an investor will need to be able to handle the carrying costs during this period.
Size of commercial property
Larger commercial properties can be harder to lease than smaller units and will cost a lot more on holding costs.
Supply & demand
The changes in supply conditions can create potential problems. An increase in new property coming onto the market in the same area creates a threat to existing tenancies as tenants may look to upgrade or expand. Strong supply can also reduce potential yields.
Changes in infrastructure
“Major infrastructure implementations or changes have both a beneficial and negative effect on commercial property returns. While infrastructure can attract commercial investment to an area, it has the negative effect of drawing tenants from existing areas. Keep in mind that areas close to CBDs are always popular. However, new growth areas further away tend to have more pronounced cycles”, ends Rainer Stenzhorn with his comments.