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Are you thinking of investing in a commercial property? There are a few things you’ll need to look out for

Assisted by Kristina Tato

The decision to invest in a commercial property does not come without significant risks. As with any form of investment, it is always important to undertake effective prior research in order to ensure that your efforts will be worthwhile in terms of a monetary return. In order to fully maximise your investment and mitigate any potential risks, Coleman Greig suggests keeping the following factors in mind when conducting your research.

Location

The location of the commercial property is pivotal with regard to both initial purchase costs and ability to find tenants. As the effect of economic changes usually differs in certain areas, it isn’t surprising to find that some areas are more affected by changes in economic conditions than others, especially where there is an economic downturn.

Affordability

It is imperative that the investor doesn’t solely focus on the bond-repayment figure, as other factors such as rates, utilities, levies, and maintenance and security costs must also be taken into account. It is also important to factor in whether your investment will remain affordable in circumstances where interest rates and other costs change and increase.

Return & Value

Whilst investors do generally see higher returns from commercial properties, this type of investment does come with a higher risk – as it often takes the landlord or their agent a lot longer to find a tenant for a commercial property, thus commercial properties do often see a higher vacancy rate.  In turn, a property’s value tends to drop where there has been a higher vacancy rate.
Although not entirely the property owner’s responsibility, investors may find that having all relevant building and zoning information (see Approval section below) on hand for prospective renters may speed up the process of finding a tenant.

Utilities

Investors should make concerted efforts to ensure that the supply of utilities (e.g. water, gas and electricity) are reliable.  When researching the property, take a close look at the costs associated with these utilities and whether there are backups/precautions in place in case of significant failure.

Maintenance

Ensure that a proper survey of the building is conducted so that you as the investor know approximately how much the cost of future maintenance will actually be.  It is often more costly to maintain commercial properties as compared to residential properties, due to extra costs such as air conditioning and any necessary security features.

Access

More often than not it will be beneficial to your overall investment if there is ease of access to the property, through the availability of parking and public transport.  Many tenants will give preferential attention to properties if they feel that the overall accessibility will help attract potential customers, or at least keep current customers happy.

Security

It may be necessary to undertake security measures for the property, especially if it has historically been vulnerable to crime.  The cost of necessary purchases and related installations may come as an unexpected cost, so it is important to research the area – as well as the building itself.  You may find that making contact with and asking questions of the local police command could be beneficial.

Defects

It is important to know exactly what you are investing in. This understanding involves being aware of any hidden defects. Take a careful look at the infrastructure and state of the building, as well as any relevant water or electrical connections to ensure that they are reliable.  You may wish to speak with relevant professionals if you are unsure of how to make these types of checks yourself.

Investing in a property without taking into account any potential defects could very likely be a waste of both time and money.  Alongside spending on general building maintenance, costs associated with repairing such defects can very easily go beyond allocated funds, thus it might not be fiscally responsible to invest in the property at all.

Approval

Before investing, and regardless of your plans for the property, it is always beneficial to take a look at the approved building and any relevant development plans. It would be extremely undesirable to purchase a property before discovering that it is set to be demolished. This can occur where the property was previously built without proper government approval.

If an investor is looking to purchase a property with plans to do anything other than keep the property as it is, it is worth speaking with the local government’s planning department to get an idea of the zoning laws that may apply to the property.  Zoning, as well as further information on a property can be obtained via local councils through the purchasing of Section 149(2) and 149(5) certificates.  

A section 149(2) certificate shows the zoning of the property, its relevant state, regional and local planning controls – as well as other property issues such as land contamination and road widening. These certificates are based on the parent property only, not on individual lot numbers.

A section 149(2) and 149(5) certificate will contain the same information, but also includes other factors such as advice from other authorities, subdivision history and easements (where the council has that information available).

The above factors are vital to take into consideration when thinking about investing in a commercial property. Researching the property, as well as the surrounding area is required in order to know exactly what you are investing in, as well as mitigating any potential risks. 

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