Incorporating commercial real estate in your investment portfolio is a smart move for diversification, and for providing some insulation against market volatility. Commercial real estate investment generally provides an opportunity for generating substantial returns, and it has proven to be a strong, reliable asset for many investors. But, what’s the best type of commercial property to invest in?
Well, it’s important to find out as much as you can about each type of commercial property, to determine which one best suits your investment objectives, your financial position, and essentially secures your future wealth creation. Here is a summary of each type of commercial properties, and how they compare.
- Commercial Land Investment
Investing in a raw land provides an extremely lucrative opportunity for the investors who understand the market. There are a number of ways to generate income with land. For example, if you own a farmland, you can allow local farmers to use the land to raise livestock or grow crops. In case the land is wooded, you can let logging companies to harvest the timber at a fee.
You can also choose to buy and hold a piece of land, with the aim of selling it to a commercial real estate developer at a later date. With the first two options, you will receive an immediate financial payoff. With the third option, you can generate a hefty profit if you do find the right developer.
- Office Buildings
In cities, office space is often in demand. For instance, if you live in a major metropolitan area, you have the option if investing in a high-rise office block with multiple office units. If you’re in a quieter town, you may opt to put up a smaller block with multiple offices.
When it comes to office space, the main factors you need to consider include:
- Grade quality: the more expensive, premium grade properties are usually the focus of consortia or institutional investors, while the lower-grade properties are the focus of individual investors and syndicates. The asset grade usually determines whether fit-out expenses or future renovations are necessary to attract a long-term quality tenant.
- Nearby amenities: cafes and shops add a level of convenience and provide the opportunity for offsite meetings for clients and staff.
- Proximity to Public transport: this will ideally make the daily commute to work more affordable for the workers, which will help the business in staff retention.
- Budget: if you want to enter the market on a tight budget, the more appropriate option for you would be small strata office suites. Freehold, substantial office towers that sit at the upper market end are typically ideal for the larger, group investors.
- Freehold or Strata: your budget will also determine whether you can afford to buy within a strata-titled complex or a freehold property. You should factor in any levies on strata, which you can either pass on to tenants or choose to absorb yourself.
- Location: office spaces ideally serve as economic and employment hubs for the markets they service, and are commonly found in CBD, metropolitan, and regional areas. Investors should go for properties that are in areas historically recognized for high demands and healthy returns.
- Quality check: in general, the higher the quality of the property, the more expensive it’ll be. Office holdings typically follow grading based on size and quality, and are Premium, A grade, B Grade, C Grade, and D Grade.
- Industrial Properties
These encompass a lot of things such as manufacturing facilities, warehouses, factories, research facilities, etc. With these kinds of properties, it’s more difficult to gauge the level of demand, and you might have to look at the broader market in order to get the feel of how easy it will be for you to get tenants.
Aside from the factors discussed in the office buildings (above), here are the factors you need to consider when investing in industrial properties:
- Size and Type: industrial properties generally have a wide scope, which reflects the wide role of the sector in servicing the economy. For example, the warehouse sector has seen a huge boom recently, due to the rise of e-commerce. However, it’s commonly the most expensive component of the asset class due to requirements such as size, staffing, and internal stacking. There are still more opportunities that suit most budgets.
- Proximity to Infrastructure: industrial properties have to be in close proximity to key infrastructure due to the inherent nature of these properties. The proximity ideally facilitates the tenant’s business and reduces their operational costs.
- Retail Properties
These are quite similar to office spaces, specifically in how they generate income. The most important thing to consider when it comes to retail space for sale, it is the location. For example, if you’re investing in a strip mall that houses dozens of units, it’s best to ensure that the area has steady traffic streams. Otherwise, you may end up struggling to attain high occupancy levels, which might drag down your profit margin.
- Multi-family Housing
These are also referred to as apartment buildings/blocks. Although these are residences for people that rent out the units, they categorized as commercial properties. The high demand for rental units especially in major cities and the increasing rental prices, apartment buildings can provide investors with a consistent stream of income.
The Bottom Line
Each of these types of commercial properties has its own different risks and rewards. As such, when comparing the commercial properties for investment, it’s important to take your time and establish your financial position, and your goals. Ask yourself the following questions: how much revenue do you expect to generate from the property? How is the market demand for the kind of commercial property you’re considering? How long will you be willing to hold your investment? How is your risk appetite?
Due diligence is the only way to find the best type of commercial property to invest in. And regardless of your investment goals, it’s important to choose a property that matches your investment strategy. Whenever you’re in doubt, be sure to consult a financial planner, an accountant, and a property specialist before you sign anything.