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Location is a key factor for commercial property

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Investing in the right type of building in the right area is imperative with commercial property

Commercial property remains a viable and even lucrative investment that offers inflation-beating returns despite South Africa’s lacklustre economic growth and political instability.
The past few years have seen a plethora of new commercial property developments, primarily in Joburg and Cape Town’s business districts but like any investment opportunity it’s important to understand the sector and the inherent risks, says John Whall, chief executive of Heartwood Properties.

“Bear in mind that an investment into any commercial property typically involves a large capital outlay and is a long-term investment.”

It is not enough to merely have sufficient capital to repay monthly bond repayments. Adequate working capital needs to be factored in to cover both tenant installation expenses and planned maintenance and upgrades.

Unpredicted costs including unforeseen repairs or economic downturns – which could significantly raise bond rates and see tenants downgrade to smaller premises, potentially leaving buildings empty – should also be considered, Whall says.

“Property investment is ideally a long-term investment, as the longer you are invested the better your return is likely to be, but this means your investment is not liquid in either the short or medium term.

“Bearing these risks in mind, it’s important to have a good understanding of the commercial property sector before deciding to make an investment. Investing in the right type of building in the right area is imperative.”

Having a good understanding of the type of tenants that would be interested in the building is also important he says, as “ideally you’re looking for long-lease tenants as this provides a degree of security”.

“In the same vein, investigate how easy it will be to let the building should an existing tenant decide not to renew their lease, and time to market needs to be factored in. New tenants tend to require that buildings are refurbished before taking occupancy, which is an expensive exercise, so the less tenant turnover the better.”

Location continues to be a key factor in the success – or failure – of a commercial property investment. Tenants typically want their office premises to have exposure to highways or main arterial routes with easy access, sufficient secure parking and a modern design.

Added to this, Whall says green design elements are becoming increasingly important given the long-term reduction in operating costs they offer tenants.

In a slow-moving economy, most new developments are being taken up by existing businesses, in the process freeing up more mature premises. This trend offers opportunities for innovative property companies to offer serviced, furnished office space and shared workspaces to meet the need for more affordable office space.

“The bottom line is that while there are rewards for commercial property investors prepared to go the distance, it’s vital to understand the inherent risks involved. For those investors eager to reap the benefits of commercial property investment but who lack the requisite expertise required of this sector, one alternative is to invest in a listed commercial property company,” Whall says.

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