What do we understand under Commercial Property?

The term commercial property sometimes also called commercial real estate, investment or income property refers to buildings or land intended to generate a profit, either from capital gain or rental income explains Rainer Stenzhorn of In2assets the Durban based commercial property real estate company.

What do we understand under Commercial Property?

The term commercial property sometimes also called commercial real estate, investment or income property refers to buildings or land intended to generate a profit, either from capital gain or rental income explains Rainer Stenzhorn of In2assets the Durban based commercial property real estate company.

Commercial property includes office buildings, industrial property, medical centres, hotels, retail centres, retail stores, farm land, apartment blocks, factories, warehouses, automotive service centres and petrol stations. In South Africa, residential property containing more than a certain number of tenanted units qualifies as commercial property for bonding and tax purposes which can differ from case to case comments Stenzhorn further.

Commercial property is commonly divided into six categories:

Leisure: Which includes Lodges, Hotels, Game Lodges, Restaurant & Entertainment facilities, Sport facilities and Café’s

Retail: Retail buildings, strip malls, sectionalised shops, shopping malls, retail centres, petrol stations

Office: Office Buildings, sectionalised offices, private schools

Industrial: Factory Buildings, Warehouses, industrial land, office/warehouses, garages, distribution centres

Healthcare: Hospitals, medical centres, nursing homes, veterinarian services

Apartment Buildings: Blocks of Flats, mixed use buildings

Investment Property: The basic elements of an investment are cash inflows, outflows, timing of cash flows, and risk. The ability to analyse these elements is key in providing services to investors in commercial real estate. Cash inflows and outflows are the money that is put into, or received from, the property including the original purchase cost and sale revenue over the entire life of the investment.

Cash inflows include the following: Rental income, operating expenses, recoveries, parking fees, proceeds from sale, tax benefits, depreciation and tax credits

Cash outflows includes: Initial investment (down payment), all operating expenses and taxes, debt service (bond payment), capital expenses and tenant leasing costs, costs upon sale. The timing of cash inflows and outflows is important to know in order to project periods of positive and negative cash flows. Risk is dependent on market conditions, current tenants, and the likelihood that they will renew their leases year‐over‐year. It is important to be able to predict the probability that the cash inflows and outflows will be in the amounts predicted, what is the probability that the timing of them will be as predicted, and what the probability is that there may be unexpected cash flows, and in what amounts they might occur.

The primary cause of investment failure for real estate, is that the investor goes into negative cash flow for a period of time that is not sustainable, often forcing them to resell the property at a loss or go into insolvency. A similar practice known as flipping is another reason for failure as the nature of the investment is often associated with short term profit with less effort ends Stenzhorn with his explanations.

Posted by In2Assets