Commercial properties can refer to commercial buildings, office buildings, warehouses, industrial buildings, apartment buildings and “mixed-use” buildings – where the property is used for a combined purpose, that is – say for retail businesses, offices and apartments. Category A buildings are newly constructed properties that conform to international best practice in terms of location, construction, equipment, infrastructure and use. As a result, these properties enjoy a premium over the prevailing average rent in the area.
Investing in commercial real estate has the potential to be very profitable. Research has shown that commercial properties typically have an annual return of 10% to 15% on the purchase price depending on the area, which is a much higher range than what typically exists for residential properties.
While there are many positive reasons to invest in commercial rather than residential properties, there are also negative issues to consider, including time commitment, professional help required, a larger initial investment, and obviously more risk.
To get around these concerns, there are some crucial areas to consider:
1. Assessment of the value of the property
The valuation of a commercial good is essential for the investment it represents. Real estate is not a commodity that can be valued or measured like an ounce of gold, which is the same in California as in Nigeria. Even Class A commercial buildings are not all created equal. Factors such as location, local economy, quality of construction, suitability of the location and more must be well grasped to assess its value. The likely future progression of the business climate in a location or a planned development in the region has a notorious reputation for skyrocketing the value of any property therein. These can be private or government plans that will usher in the sophistication of the region or the way business is conducted.
The best thing a potential investor can do is research where the major sectors of the market are in order to assess the fair market price and attempt to buy at or below that price.
2. Information in public lists
It is naive to buy or invest commercially, solely on the basis of publicly available information. This limits your options and there’s a good chance you won’t find the one that’s right for your business. Additionally, not only is such information more likely to be incorrect and intended to mislead, there is always more information, positive and negative, that goes unpublished. It is best to work with experts in Class A commercial real estate, who are familiar with other properties available that are not listed or have more information about those listed on public websites.
3. Legal Due Diligence
Not doing legal due diligence (LDD) is a common mistake when investing in any form of real estate, whether commercial or residential. However, the financial risk relates more to commercial properties, hence the increased caution in undergoing an appropriate LDD at the property investigation stage. A serious survey error can wreak havoc when attempting to obtain financing for a business development or create financial problems once in possession of the property. LDD here includes a physical inspection of the property, a search for the property in the land register, the office of the surveyor general, the estate register and / or the court registry, etc. When one of the parties is a business or a registered company, a search should also be conducted at the Corporate Affairs Commission. The buyer also has the right to raise questions about history and title to 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 investment consultant who are experts in your target market and can appraise commercial properties. These professionals can guide you through regulatory requirements and usual practices.
Regardless of the size of your real estate investment portfolio, the best way to take care of your investments of this nature in the long term is to hire the services of a good property manager. At the same time, a qualified property management company can guarantee reduced stress, mitigated risks and increased profit margins. Property managers are particularly important for Category A buildings, to ensure that these buildings comply with specified standards and rules to maintain their status. These standards include emergency elevators, stairs, the presence of fire extinguishers, parking lots, green elements, etc.
5. Government influence
In Nigeria, all land belongs to the governor of the state where it is located. The government, through its Ministry of Urban Planning and Housing Company, has town plans which specify the areas in which commercial properties are to be located. Likewise, through new policies and laws, the government can then map various neighborhoods for different purposes. It would be reckless to build or invest in a Category A tech company building in Surulere, for example, if the Lagos state government designated Ikeja as the state’s tech hub. Investors should be aware of government policies every time.
When investing in a business, it is also important to consider the taxes and fees to be paid first and to speak to experts about them. These fees include building permit fees, consent fees, stamp fees, registration fees, capital gains tax, etc. These fees, when combined, are exponentially higher than the fees payable for residential properties because these fees proportional to the value of the property. Moreover, the government, through its tax services, can impose various levies on commercial properties and businesses in general.
Proper consideration of these five questions goes a long way in mitigating the risk associated with investing in Class A commercial real estate properties. Keeping this in mind, the question for such an investor then becomes how to increase their portfolio. ‘investment.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.