When considering a commercial property investment it is wise to set some standard rules for the review so that you can compare opportunities that the various properties bring you.
Investment properties typically exist in the retail, office, and industrial property markets. We will not go into the other property types of tourism and leisure here in this article as they themselves take more comment and lengthy review.
Here is a useful list to consider with investment property.
Some Key Property Concerns
Rent: The levels of the existing rent are important to the investor or landlord but more important are the levels of rent in the future. It is a matter of what rent escalation the lease allows for and in what time frame. A good lease with a good rent review profile in a sound and well managed property will always attract property investors.
Outgoings: These are the property running costs. Importantly they should be in balance and in comparison to other properties of similar types in the same region. If the outgoings are out of balance to similar properties then you need to know why as any astute property buyer will ask about the outgoings. They know what are the averages of outgoings in the area and will not want to pay above the average unless there is a solid and sound reason to do so.
Supply and Demand: How much other property is coming into the market in the next few years? Will that property affect the property that you are looking at? Could this impact on the tenant profile or interest in your property? This equation or consideration is called supply and demand. It will impact on buyer and tenant interest in the region in which your property is located.
Location: Does the property give good exposure to passing traffic or customers and does it have good access for people and motor vehicles? Add to this the consideration and availability of car parking.
Design: Is the property user friendly and attractive? A good property investment usually looks good and is well maintained. This is to maintain interest in the property from the tenant and the customer perspective. If these people feel good about the property when they visit it or use it, then you are well on the way to good property performance. As part of this process you can conduct interviews with people as they use the property to see and identify any latent concerns. In the case of retail property this is highly recommended as retail property is strongly geared to the sentiment of customers.
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Amenities: Are you providing everything that a modern business, tenant, or customer needs? Amenities are many things and it really depends on what the property is doing or serving. Most people that use the property expect ease of use and access to the amenities including toilets, car parks, common areas, etc. Retail property has a higher level of consideration in this category.
Services: Are your property services modern and performing well? This would include water, gas, roads, electricity, lighting, telephones etc.
Parking: Are customers and tenants well served with respect to the parking of vehicles? Ease of access to the property is critical and at a premium today. Motor vehicles are part of business and life for all people. If parking is not well catered for on the property then the interaction of the property with public transport is critical.
Tenant Covenants: This relates strongly to the leases and documents of occupation on the property. The word covenant relates to the clauses or lease terms. Every lease can be different so it pays to read all occupancy papers or leases. Are the leases and tenant profiles strong and attractive to future occupancy?
Tenancy Mix: Perhaps this is more critical in a retail property however it can have impact in an office property. Some landlords must be very careful as to the tenants that they select for a building. It is quite possible that a low profile and poorly selected tenant will detract from the customers that visit the building. Other tenants will also then become concerned and potentially have little interest in ongoing occupancy. This then says that not all tenants are good tenants for the property. Add to this another question of proximity and placement of tenants to each other. Are the tenancies well balanced to satisfy the customer demands? Can tenants that are located near to each other affect each others business through impact of customers, product, service, hours of trade, or staff?
Management: The strength and processes of a property management team will make or break a property. The property management processes will impact on so many things including rent, operating costs, tenant sentiment, and lease stability. For this reason ask the tenants about the property management experiences that they have seen over recent time. Any negative comments should be explored for hidden problems.
Lease Agreements: Are they landlord favorable and do they provide long term attractive and stable occupancy? What is the length of tenure or terms of all the leases and do they expire at the same time? Does this present an issue to the landlord as to property stability and exposure?
Transport Routes: All modes of transport to the property should be looked at. Make your assessment as to whether they are convenient and modern. Do they serve the tenants and the customers to the property and how is that done?
Source raw materials: In the case of industrial property the access to raw materials can be an issue for the tenant. What raw materials are needed by the business or tenant and can they get to them easily?
Power Supply: Industrial property will usually need a serious amount of power for machinery on the property. Access to that power is a decision factor for the tenant that occupies the premises. Ask the local power authority if 3 phase or high tension power is nearby or available.
Labor Availability: Business tenants need a labor source as part of their operation. This labor supply needs to be stable and convenient. This is why businesses are located near to transport corridors on the radial road points to a city or town. Is the labor market nearby and active? Can that labor supply reach the property easily? Public transport will enhance this situation.
Goods end market: If your tenant is to manufacture anything, they will need to move it to their customers. How close is the product buying market for that tenant and how will they get to it? Is the market for the tenants goods or services growing and strong?
Rent and Vacancies: These are always a concern in investment property and need monitoring. Shifts in population and zoning regulations regards property can quickly shift the attractiveness to occupy a property.
Pre-lease market: These are the newer properties that are coming on the market soon. They are usually keenly priced or rented and will impact on other existing property in the area. The property investor or developer in the newer property has one goal only and that is to fully lease the finished property as quickly as possible. Expect them to chase the tenants in your building.
Owner Occupiers: Investment property moves in cycles between renting and ownership. Many businesses will do either depending on what is more attractive to them in the economic conditions prevailing.
Investors demand: The balance between the property market and the share market is interesting to monitor. Investors move into property when they need longer term investment stability. If the share market is volatile and unpredictable, then property investment moves to the front of the line and becomes the investment of choice. The only problem investors can have is in getting the finance from the banks when they need it. This movement between investment types says that you should monitor levels of return that are possible between shares and property.
Corporate Businesses: Major businesses like to off-load capital from balance sheets. This means a potential sale and lease back of property from time to time. This is also usually done when the property is in the last stages of use or need for the tenant. They may sell the property and take a lease for a term of years whilst they create the next level of property strategy. Always look for tenants and businesses that are in the stages of change or flux. Mergers, acquisitions, expansions, contractions, etc. all create pressures on the property that the tenant may occupy.
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John Highman is a prominent investment real estate speaker and coach that helps real estate agents and real estate brokers globally to improve their commercial real estate market share and close more sales and leasing deals. He himself is a successful real estate agent that has specialised in commercial, industrial, and retail real estate of all types for over 30+ years.
Whether you specialise in real estate sales, leasing, or investment, John has the tools that can help you and your office succeed in your market.
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