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Invest With Confidence

Tips On Commercial Investment

EMAAR-INDIA
2018-02-01

Making a commercial investment is not as difficult as it sounds. Allow us to decode the puzzle through this blog and you will realize that by following just a few rules, you can ensure you keep enjoying the windfall.

Location: Whether you are looking for a good source of rent or capital appreciation, look for a low-vacancy location as the tenants there will be less likely to move out and you will always be on the better side of the bargain.

Quality: The rule is simple. Two buildings could be in the same locale. But they may not give you an equal appreciation for your money. So it is always advisable to go for the one that is high on quality. Certifications like LEED Gold or Platinum Ratings will not just get you a better rent but will also help you sell faster.

Demand vs Supply: If you are looking to invest in a commercial property, keep an eye on the annual demand reports published by premium broker firms. Since every city has micro markets and each micro-market has stock (offices already completed and leased) and supply. If the supply over next 2-3 years is more than the demand in the recent past, the rents and prices of the existing as well as new constructions will come down. So, you know you can get a good bargain.

Market Rent vs In-place Rent: This is the most popular practice among institutional investors to see how risky the said property could be. So while you compare the prices of the buildings with space available, you also need to compare the latest market rent (the amount at which new buildings are being rented). A smart investor would go for the one charging rent closest to the market rate. As the tenant is least likely to vacate or negotiate with you.

Quality of Tenant: A good tenant like a bluechip multinational will not just be punctual about rent payments and pay escalations happily but will also significantly increase the value of your commercial property. What’s more, they will stay longer as they will value the property and you won’t also have to look for tenants too often.

Base Rents vs Fit-out Rents: If the rent return shown by the developer seems higher, chances are he has duped you by covering the fit-out rent too. Since the rent for fit-outs ends in 5 years, do check the effective date and give your hard earned money the best it can get.

Lease Structure: Commercial leasing doesn’t work like residential. Mostly structured on a 9-year pattern (3+3+3) or a 15-year term (5+5+5) meaning escalation every 3 or 5 years, commercial lease has its own inherent risks. E.g. The tenant cannot be asked to vacate before the lease is over. Also the tenant cannot vacate within the locking period (3 or 5 years usually). In short, the longer the lock-in period is, the better it is for the investor.

Security Deposit: In case of a commercial lease, the deposit mostly is about 10 to 12-month rent. So if the tenant is offering a deposit for 6 months or less, they might be having cash flow issues. Take your decision wisely.

Diversification: Investing all your money in just one property could be a big risk as in case the tenant vacates, the outflow will exceed the inflow. Since the maintenance costs and the taxes will still have to be paid duly while there will be no rent coming. Investing in multiple properties will control this variance and reduce the risk to the minimum.

Hope you keep these points in mind while making your next commercial investment and enjoy the best return possible.

 

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