Commercial properties may refer to retail buildings, office buildings, warehouses, industrial buildings, apartment buildings and “mixed-use” buildings, where the property’s use is mixed, 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 Grade A commercial properties has the potential of being highly profitable. Research has shown that Grade A 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 other commercial properties or residential properties which is estimated at 1% to 5% at best.
Generally, while there are many positive reasons to invest in commercial real estate over residential, there are also negative issues to consider, including time commitment, professional help required, bigger initial investment and obviously more risks. These issues are of even greater concern when it comes to Grade A properties.
To circumvent these negative concerns, there are crucial areas in commercial real estate investment to consider:
- Assessing the Value of a 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 will affect the value of the property. These variances must be well captured and assessed to value the property. The best thing a person looking for commercial real estate can do is to research where the prime areas are in the market to gauge a fair market price and attempt to purchase at or under that price.
2. Information in Public Listing:
It is naïve to buy or invest commercially, based solely on information that is publicly available. 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 is best to work with experts in Grade A commercial real estate who know about many other available properties not listed or have access to more information about those listed on public websites.
3. Legal Due Diligence:
Failing to carry out legal due diligence is a common mistake when investing in any form of real estate, be it commercial or residential. However, the financial risk is more in commercial properties, hence the heightened caution to undergo proper legal due diligence, to ensure that the investment or purchase is beneficial. A serious legal mistake can wreak havoc when trying to obtain financing for commercial property or create financial problems once in possession of the property. Legal due diligence here includes a physical inspection of the property, search of the property at the Lands Registry, Probate Registry and/or Court Registry. 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:
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.
5. Property Managers:
Regardless of how small or vast your real estate investment portfolio is, the best way to take care of your investment 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 it’s status. Such standards include emergency lifts, staircases, presence of fire extinguishers, parking lots, green features e.t.c.
These five considerations go 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.
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