Commercial properties may refer to retail buildings, office buildings, warehouses, industrial buildings, apartment buildings and "mixed-use" buildings - where the property is put to combined use, i.e. for retail, office and apartments. Grade A buildings are newly built properties that conform to international best practices in terms of location, construction, equipment, infrastructure and usage. Consequently, these properties enjoy a premium over the average rent prevailing in the area.
Investing in commercial property has the potential of being highly profitable. Research has shown that commercial properties generally have an annual return of 10% - 15% on the purchase price depending on the area, which is a much higher range than typically exists for residential properties.
While there are many positive reasons to invest in commercial properties over residential, there are also negative issues to consider, including time commitment, professional help required, bigger initial investment and obviously more risks.
To circumvent these concerns, there are crucial areas to consider:
1. Assessing the Value of the Property
The valuation of a commercial property is pivotal to the investment it represents. Real estate is not a commodity that can be valued or measured the way one ounce of gold can, which is the same in California as it is in Nigeria. Even Grade A Commercial buildings are not all created equal. Factors such as location, local economy, quality of construction, the desirability of location and more must be well captured to assess its value. Likely future progression of the business clime in a location or scheduled development of the area has a notorious reputation for skyrocketing the value of any property situated therein. These could be private or governmental plans that will usher in sophistication to the area or to the way business is done.
The best thing a prospective investor can do is to research where the prime areas are in the market are to gauge a fair market price and attempt to purchase at or under that price.
2. Information in Public Listings
It is naïve to buy or invest commercially, based solely on publicly available information. This limits your options, and chances are you won't find the best fit for your business. Also, not only is it more likely that such information is incorrect and intended to mislead, but there is always more information, positive and negative that is not advertised. It's best to work with experts in Grade A commercial real estate, who know about other available properties not listed or have more information about those listed on public websites.
3. Legal Due Diligence
Failing to do legal due diligence (LDD) is a common mistake when investing in any form of real estate, be it commercial or residential. However, the financial risk is more for commercial properties hence the heightened caution to undergo proper LDD at the stage of investigating the property. A serious investigative mistake can wreak havoc when trying to obtain financing for commercial development or create financial problems once in possession of the property. LDD here includes a physical inspection of the property, search of the property at the Lands Registry, Surveyor General's Office, Probate Registry and/or Court Registry, etc. Where either of the parties is a registered enterprise or company, then a search should also be conducted at the Corporate Affairs Commission. The buyer is also entitled to raise questions as to the history and title of the property.
4. Work with a Team of Professionals Especially a Property Manager
A good investment team would include a real estate agent, legal professional, professional lender and an investment consultant who are experts in your intended market and can evaluate commercial properties. These professionals can guide you through regulatory requirements and customary practices.
Regardless of how small or vast your real estate investment portfolio is, the best way to take care of your investments of this nature, long term, is to employ the services of a good property manager. Simultaneously, a qualified property management company can ensure reduced stress, mitigated risk, and increased profit margins. Property Managers are especially important for Grade A buildings, to ensure that these buildings conform to specified standards and rules to maintain their status. Such standards include emergency lifts, staircases, presence of fire extinguishers, parking lots, green features etc.
5. Governmental Influence
In Nigeria, all land is owned by the Governor of the state where the land is located. The Government, through its town planning ministry and housing corporation, has city plans which stipulate areas in which commercial properties should be located. Likewise, through new policies and laws, the Government may subsequently map out various neighbourhoods for different purposes. It will be foolhardy to build or invest in a Grade A Tech company building in Surulere for instance, if Lagos State Government has designated Ikeja as the Tech-Hub in the state. Investors must be abreast of government policies per time.
When investing commercially, it is also important to initially consider the taxes and fees to be paid and speak to experts on this. Such fees include building plan permit fee, consent fee, stamp duty fee, registration fee, Capital Gains Tax etc. These fees, when combined, are exponentially more than the fees to be paid with respect to residential properties, as these fees are paid in proportion to the value of the property. More so, the Government, through its revenue services, may impose various levies on commercial properties and businesses generally.
Proper consideration of these five issues goes a long way to mitigate the risk associated with investing in Grade A commercial real estate properties. With these in mind, the issue for such an investor then becomes how to scale up his investment portfolio.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.