What is Commercial Real Estate?
Commercial real estate is property exclusively used for business purposes or designed as operational offices. Commercial real estate includes retailers of all sorts from huge shopping complexes to offices, restaurants, kiosks, hotels, pharmacies, gas stations, etc.
Why should you invest in Commercial Real Estate?
Without a commercial real estate, there will be no organized venue for business to successfully carry out their activities and cater to customers conveniently. Companies generally rely on commercial investors to erect structures in the allotted commercial zones and lease the space to them for an agreed period of time. Other than creating a cost-effective and profitable business space, commercial real estate investors, help boost local businesses.
When commercial real estate investment is rightly done, it is extremely lucrative and serves as a secure source of income when compared to the volatility of the stock market. A bulk of the returns from investing in commercial real estate comes from tenant rents. Typically, business spaces are leased out to tenants for an agreed period of time, say two years and even up to ten years. After this, the tenant may choose to renew the lease period, or the property is refurbished to suit another business.
There are two major ways of investing in commercial real estate. They include:
Here, investors become the landlord through direct acquisition of the physical property. Unlike residential real estate, commercial real estate requires substantial capital to purchase and revamp to suit the type of businesses expected to move in.
Investors most suited for direct investment need to have an in-depth knowledge of the real estate market and the interworking of the local economy or work with a real estate company that does. Commercial properties are a high-risk, high-reward real-estate investment. As such, if it’s not done correctly, losses may be inevitable. For instance, there are certain streets like the Admiralty way in Lekki and the Computer Village at Ikeja that are booming locations for commercial real estate. There are also certain areas that aren’t suitable commercial zones. The result of carrying out a proper feasibility study before investing in an area is a high vacancy rate or low occupancy rate. There are a good number of unoccupied plazas around Lagos, especially those located away from major roads. Most businesses would typically go for areas that offer good visibility to attract more customers.
Determining the ideal location is a bit tricky as the most populated street isn’t always the high in-demand location. Also, the type of structures built should be suitable for the businesses that would likely thrive at the location. For instance, constructing a building with the purpose of creating co-working spaces is completely different from a building constructed to house a restaurant.
The ideal property is in an area with a high demand for commercial real estate and low supply, coupled with favourable rental rates. The economic growth of an area greatly influences the value of commercial properties.
For the third year in a row, Hong Kong’s Central district is ranked the world’s most expensive office space, primarily due to the high demand from Mainland Chinese firms. The average office space in Hong Kong’s Central costs $306 per square foot per year. That’s roughly N 120, 000 per square foot.
READ: 1004 Estate Model
Alternatively, indirect investment allows investors to invest in companies that primarily finance or develop commercial properties like banks or real-estate companies. Another option is owning various market securities like Real Estate Investment Trusts (REITs) and exchange-traded funds.
Real-estate investment trusts (REITs) are corporations or trusts that operate as income-producing real estate. They use the pooled capital of investors to purchase and manage income property, which is often commercial real estate. REITs are traded like stocks, where you can buy or sell REITs through a stockbroker.
The profit potential of investing in commercial real estate is limitless. A classic example is how McDonald’s – a renowned fast-food company – derives most of its profits from its property assets and not from selling food. With its vast global network and expansion, McDonald’s owns valuable property in premier locations all over the world.
Advantages of Commercial Real Estate
Profitable Lease Rates
Commercial real estate pulls in large amounts of cash flow from its attractive leasing rates. In areas where there’s a high demand for commercial real estate and low supply, limited by land or law, the value of commercial real estate skyrockets, allowing investors to make fantastic gains.
Long Lease Periods
Unlike residential real estate, commercial real-estate benefits from comparably longer lease contracts with tenants. These long lease periods give the commercial real estate holder a stable cash flow and high occupancy rate of the building.
Other than the attractive lease rates, high occupancy rate and providing a stable source of income, commercial real estate offers the potential for capital appreciation. As long as the property is adequately maintained and renovated.
Investing in commercial real estate is a profitable and effective way to diversify your investment portfolio. Give us a call today on 09081234564, 09095757575 to get our latest juicy investment deals.
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