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Value investors reap above-market returns

Commercial property buyers need to become value investors if they want to see above-market returns.

While the past few years have shown good capital appreciation and income returns for most industrial and commercial properties, this may not be the case going forward, cautions Tony Bales of industrial property broker Epping Property.

The market has changed and wise investors need to seek properties that will grow at an above-average rate if they want decent returns.

Bales says value investing is investing in a property that has been undervalued or where one can purchase the property at a below-market price.

“The specific benefits are an above-market appreciation in either the capital value or rental income or both. It is important to understand the difference between price and value. Price is what you pay, while value is what you receive.”

He says buying investment property at too high a price isn’t good value and is the “surest way” to limit future returns.

“However, commercial property can double or triple in value for an investor who can spot a value purchase.”

Finding properties that offer value may involve sifting through many opportunities. It is a three-step process, Bales says.

Spot hidden growth potential: For example, does the property offer underutilised space that can be developed? Is there a parking garage that can be leased out for night parking if close to restaurants and event venues? Can large empty office spaces be divided into smaller units to meet market demand and reduce vacancies?

Develop a strategy to unlock identified and untapped value.

Execute your plan.

What is value for one investor may not be value for another. As an example, Bales says a passive investor may offload a property to someone who has the capacity, time, and inclination to develop it and unlock the potential value.

Questions buyers should ask themselves when looking for a value property are:

Do I have an excellent understanding of the property I wish to buy?

Does the purchase price offer upside potential?

What is it about this property that will ensure its value grows faster than others?

How do I ensure this potential value is unlocked as soon as possible?

He says the highest returns come from buying commercial investment property at a price that doesn’t reflect its inherent attributes. Value investors follow strategies to find, and mine, those features.

“The greatest value investor of all time, Warren Buffett, did not buy technology shares during the boom in the late 1990s, a move for which he faced major criticism. However, his actions were well-rewarded as today he is one of the wealthiest people in the world. And he has now included tech shares in his investment portfolio.”

Bales says it is also important to distinguish between the listed property sector and investing directly in physical property.

“Unfortunately, the listed property sector has had a torrid past 18 months. Investing in listed shares is different from investing in specific physical properties. It is important to understand what the drivers of the listed property sector are versus the drivers of physical commercial and industrial property. Value investing in the listed property sector is different from valuing investing in specific properties.”

Furthermore, investors must see the value concept as one without borders. So what may seem overpriced to South Africans might be value for international players due to the higher yields.

“Conversely, when the US dollar strengthens, we must expect the South Africa property market to offer less value than more developed countries, and hence investors will move funds to countries that offer more perceived value.”

Bales says the most successful commercial property investors in the next 24 months are going to be those focused, knowledgeable players who exploit the concept of value investing.


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