Understanding commercial property is essential if you are considering investing in Commercial Space.
Commercial property is an asset class with excellent investment potential – provided that potential purchasers are aware of the process involved and the unique attributes of the various building types on the market.
If you’re a first-time buyer weighing up the benefits of a commercial real estate purchase in Cape Town, this guide will take you through every important aspect of the process and provide you with the information you need to make an informed and financially prudent decision.
Let’s begin by taking a closer look at this property type and its unique attributes.
Understanding commercial property – is it a unique investment?
Many first time industrial or office building investors make the reasonable assumption that the residential and commercial property markets are almost identical – but this isn’t exactly the case.
While there are similarities between them, it’s important to note the differences between these two asset classes from the outset. Here are some unique features of commercial properties:
- Higher asset value. An office building or industrial unit is typically more costly than the average home and therefore requires a greater initial investment
- Special financing requirements. Unlike a home which may be financed up to 100% using a mortgage, a commercial building will require a more substantial cash outlay. Repayment periods are generally shorter too, with the average being 10 years.
- Diverse income sources. A commercial property may be home to a variety of retail, office and possibly industrial tenants – allowing the owner to reduce vacancies and realize the highest possible return on investment.
Given its unique nature, an investment in commercial real estate can bring several unique benefits. These include:
- Return on investment
- Reliable rental income
- A variety of potential tenants
- Tax benefits
- A good inflation hedge
- Acquiring an asset with the potential to appreciate that can be used to leverage other investments
Before you invest in office space or an industrial building it’s essential to understand how this property market functions and what to look out for in a desirable building.
The different types of commercial buildings
Three distinct types of properties fall under the commercial realty banner.
Each one serves a specific economic purpose and will be of interest to certain types of investors and potential tenants.
These range from one-story office park units to high-rise towers of the type that can be seen in the CBD or Century City. This tends to be the priciest category of commercial property and appeals to corporates and successful SMEs.
The first category includes a broad variety of shops, showrooms and premises for service-based businesses.
This type of property may be part of a larger commercial industrial building or may be found in a specialised retail development like a shopping mall
These vary in size from small warehouses to large scale factories employing thousands of people and housing rows of specialized equipment.
While industrial property may appear less expensive per square metre, the size of a large factory or warehouse can result in a substantial total investment that will require financing and a significant initial outlay of investment capital.
How is commercial real estate valued?
Unlike residential units, office and industrial spaces require a more in-depth valuation method than simply studying recent selling prices for comparable properties.
The following methods are used to ascertain the prospective value of an office building, retail space or industrial facility:
- Replacement cost. This equates to the cost to rebuild the property from scratch.
- Potential income. This method uses the desired capitalisation rate (the expected return on investment as a percentage of the total value) and the building’s net operating income to estimate its investment value
- Gross rent multiplier. By dividing the building’s total rental income by the average sales price of similar buildings, an approximate valuation can be established.
A building with a net operating income of R500 000 per year and a capitalisation rate of 10% may be valued by using the formula NOI/Cap Rate to give an estimate of R 5 million. Many buildings will exceed this value.
In addition to these methods, comparative studies that examine the average sale price of similar buildings can help to narrow down the expected value of a property. Ultimately, however, the market will determine the actual selling price of a given commercial building.
The legal aspects of property investment
South Africa has a long history of secure land tenure and solid property rights – including the provision for foreign nationals to buy and sell land and buildings relatively freely.
However, recent proposed legal changes, including the prospect of land reform through expropriation have raised concerns in the investment community.
- At the time of writing, the South African government is still going through the legal and political process of introducing expropriation laws for the purposes of land reform.
- It’s not clear exactly what types of property or what areas of the country might be affected once the laws are passed, but with changes to section 25 of the constitution and the introduction of the Expropriation Bill it’s likely that all forms of property could be included.
Despite the concerns that this legislation has raised, the government has endeavoured to proceed with caution and not undertake actions that would undermine the economy.
For commercial property investors, the ownership landscape should become clear over the course of 2021. If you have specific concerns about this issue, it’s always wise to consult an attorney for expert advice.
Is now a good time to invest in Cape Town commercial space?
When it comes to investing, timing is everything. Buying into the Cape Town commercial property market at the right time can help you secure excellent value for money, reduce your risk, and lay the foundation for healthy growth in the value of your investment.
The following factors play a key role in the growth of the property market commercial property market:
- Interest rates
- Local infrastructure
- Economic outlook
Cape Town scores exceptionally well on all of these points, with the city’s dynamic modern economy and educated population contributing to healthy urban GDP and population growth.
As Africa’s tech hub and a long-time favourite of foreign and local visitors and investors, the mother city’s long term outlook remains exceedingly positive in a post-COVID era.
If you’d like to invest in Cape Town office, retail or industrial space, our team is on hand to support you. Contact us today to view our portfolio, schedule a viewing or simply chat about your property needs and investment goals.