The country’s demographics are changing and this results in investment opportunities emerging through demographic trends.
ANYONE who has ever bought or sold a house knows that the right location is the number one rule of real estate. Those purchasing property for investment purposes also would be wise to remember a new edict: diversification.
For experienced investors in the residential property market, this
article is meant to assist those keen to diversify into commercial real estate investments.
Generally there are three types of commercial properties that you can consider:
·Shop houses/shop offices
·Strata office lots/office suites (part of an office building)
·Strata retail lots (in shopping complexes)
You would want to look for commercial properties that have enduring value, steady growth and that provide you with good cashflows. Therefore, factors that you should consider in commercial real estate investment, other than of course, location, are :
Quality of developer and management :
This is the most important and crucial element, especially for the purchase of strata office and retail units. The developer and management’s role is of paramount importance to ensure the success of the investment and also for the management of tenants and owners, creating an environment conducive for business.
Examples of strata offices that are, in our opinion, well managed are the UOA Centre, UOA II and UOA Damansara.
The covenants need to be strong and practical while management approach needs to be business-oriented.
Market conditions :
Look out for properties that have a track record of success. Also review the location especially in terms of current and future supply. Absence of competition is always good for your investment.
However, also look at the market segment the property is in within that locality and see whether there is competition at present and in the future. This is an important issue especially when looking for new tenants.
For example, double-storey shop houses in Bangsar are in great demand due to the lack of supply of that type of property in the said location.
On the flip side of the coin, commercial units at Kelana Jaya (Centrepoint and Square) are feeling the effects of oversupply of the same category of offices in that particular location, with rentals facing downward pressure.
Emerging trends :
The country’s demographics are changing and this results in investment opportunities emerging through demographic trends. Equally, new trends are also emerging due to changes in construction, design, technology and automation etc.
These changes can strengthen under-performing properties you may be looking to buy. Therefore, keep a keen eye out for hidden opportunities to gain a competitive advantage.
An example of a development that was developed according to the demographic needs is Plaza Mont Kiara that filled a gap in the market. Likewise, opportunities to buy into and upgrade an investment are in the likes of the older shop offices in Medan Damansara and also Brickfields.
Sellers' motivation :
Enough said – a highly motivated seller would always provide some sweetener to the buyer.
Lending appeal :
An attractive collateral to your financiers will always keep them happy and provide you easy access to funds to invest in properties. The trick here is to start looking at each of your investments from a banker’s point of view. In this manner, you are assured of funding arrangements as per your liking.
In the long-term, a solid collateral to the banker will also allow you to refinance the property, especially if you need to use the property to help you secure the next investment.
Design of layouts :
This is a factor that is usually underrated in its importance. Good designs result in an efficient floor layout that attracts tenants, as it is easy to renovate and fit in more staff and space. You also might be able to have multiple tenants in a single unit if the layouts are efficient.
If you have an easily adaptable layout, you will be able to attract tenants from a wider market range.
Quality of tenant and term of lease :
These two factors are the most important factors in commercial real estate investments. If you are buying new locations or vacant lots, the question to ask is to what type of tenant profile would this property appeal.
Ideally, a strong corporate (or government) tenant or a reputable retailer with a minimum of a 3-year tenancy term is ideal and in fact a plus point to the capital value of the property. With a tenant like this in your property, a successful investment is in the making.
Terms and conditions of
the tenancy :
Commercial issues in the tenancy terms and conditions relate to things like the payment terms, rent-free periods, termination clauses, renewal clauses and method of rent reviews, landlords obligations and tenants covenants etc.
Management/maintenance cost :
Do not be complacent just because you have a good cashflow from your commercial real estate investment. Wherever possible, you should seek properties that you anticipate to provide you a lower operating cost (rates, taxes, maintenance, and service contracts) as they may suddenly start to escalate – and unexpectedly affect your overall return.
Being able to control your costs will improve your bottom line, same as increasing the rentals.
The above 9 tenets should act as a guide for you in your journey into investment of commercial real estate. As usual, it is always good to back up your decisions with ample information, a structured decision-making process and reliable information.
l Previn is the chief executive officer of Zerin Properties, a licensed and registered estate agency service provider. For feedback and inquiries, please call 013-3311-007 or e-mail email@example.com