Investing into commercial properties

This article has also been posted in 'MY-RealProperty2".

Q.
Why is it difficult in investing into commercial properties?

A.
Firstly, the argument here is investing in commercial properties, not buying for own use.

The major difference in buying for investment is about gain from rental or re-sell ('FLIP'), whereas buying for own use is about utility and maintenance.

You definitely would not be interested in using a property which is burdened with maintenance that you cannot carry out your business activities. Similarly, you would not want a property that cannot be utilized for your business - car tyre shop in a shopping mall? Who is going to drive his car into the retail store of a shopping mall!?

Thus, investing into commercial properties is about gain from rental or gain from disposal at a profit in the future.

Sub-sale

The difficulty of investing into a commercial property is very much reflected in sub-sale.

Why?

It asks the questions below?

1. Why should a property be sold when it is commercially a piece of jewel?
2. What price is the right price when a commercial property is for sale? Is it based on the potential to make profit for your business, or for that matter, which business?
3. How to judge the potential of the commercial property, its locality and future potential?

For the first question.
If the property is prime property, why should it be sold? Most owners would prefer to keep the property for rental yield and capital appreciation. Therefore, the better the value of the property, the harder is it for sale!

For the second question.
If the price is high, is it too high to invest as your tenant's business might not be able to cover the cost. This is like fixed cost, that needs to be factored into the calculation of your tenant's products, like that of factory cost, equipment cost and utility bills.

For the third question.
Locality, potential to grow in the future. This is very subjective. For one, it depends on economic environment, and the other, it depends a lot on the development in the vicinity. Sometimes, it can be synergistic (more crowd pulling) and sometimes, antagonistic as competitive properties can wear down the rental value. For example, in the rural areas, the new commercial properties will pull away the crowd from existing properties.

Therefore, to come across a good commercial property for sub-sale is rare and sometimes an unexpected coincident. The issue is at what price? As the other two factors (locality and ongoing business viability) are very much related to the interpretation of 'value', it is very hard to find a jewel at a fair price. In fact, the question should be what premium is 'premium'?

You are definitely not interested in investing in a lousy commercial property which has no rental value and you are bound to maintain and repair it over years!

Thus, when a good sub-sale of commercial property comes along, grab it at once!