Commercial property can be a useful and rewarding asset for investors looking to diversify their portfolio, whether they are looking to start investing in property or would simply like a change from residential property investment. However, as with all investments, it’s essential to understand the risks as well as the returns. Here are some golden rules to remember before you make this commitment.
Commercial properties are more exposed to economic changes
Economic changes can and do affect the residential property market, but commercial properties are even more vulnerable. This means that should the economy slow down, as it is at the moment, the unemployment rate rises in response as consumer spending drops and companies are more likely to go out of business. Generally, this affects the retail sector first, as well as restaurants and bars, followed by transport and distribution, and manufacturing companies, having a knock-on effect down the chain of supply and causing warehouse and factory values to decrease.
It’s easy to see why this happens – a slower economy puts more strain on income and a higher risk of layoffs, so people simply don’t have the money to shop and spend as much as they did before.
Commercial areas are more likely to be subject to significant change
Before investing in a commercial project, you have to look closely into the future of that area and property. Access to transport links and proximity to businesses that exist within your tenants’ ecosystem are essential, but so is checking local council plans to see what they have in store for the area. Zoning changes, massive developments of similar properties or a huge competitor moving in could all disrupt your plans.
Investing in commercial property takes a robust budget
It’s far easier to anticipate and absorb the costs of a residential property than it is for a commercial one. There’s generally a higher cost of entry to invest, you may have to do significant work to create a space that will attract tenants, and if you want specialised tenants in your space (for example, a child care facility, senior care facility or restaurant) it needs to be compliant with local standards and regulations.
Does this mean I should avoid commercial property investments?
Absolutely not – but it does mean that you need to have the right information and insight to recognise a good opportunity and make an informed decision if you want to reap the rewards. In our current economy, there are plenty of opportunities out there to discover a bargain and get ahead – but it takes savvy investment advice to make the right choice.
Jason Scholtz is the CEO at Envision Investments and a leader in the property and strategic investments industry in South Africa. For more investor tips and an insider’s look into the South African market, be sure to get in touch, keep an eye on this blog or visit http://www.envisioninvestments.co.za/