Real Estate Investor Magazine South Africa February/ March 2020

Commercial vs residential You are ten steps ahead than your fellow investor if you understand how commercial real estate is different from residential properties. Often the value in commercial real estate lies in the available square footage and generally have longer leases than those of residential property, and therefore have the potential to earn a higher income. While it’s been previously seen as an avenue applicable to institutional investors, more private investors are entering the commercial market in cooperative companies or groups. Commercial real estate needs to be conveniently located for business. This may seem an obvious point, but in order to decide if the property will benefit you long term, you should understand the tenants you are trying to attract and whether the property will fulfil their needs. CONSIDERATION BEFORE INVESTING 1. 2. 3. 4. 5. 6. Overlay zones Traffic Ease of access Adequate public transport Safety Parking Risk involved One benefit of leasing a commercial property is its ability to accommodate more than one business. This lessens the risk of having any months with no income and only one or two units will be vacant at one time, if any. It’s advisable to prepare for vacancy and it’s useful to have funds set aside to cover these expenses to avoid liquidity. Diversifying your investments will lessen the risk involved when investing in commercial property. While this avenue of investment can seem daunting, it’s not impossible, especially with the advice of a commercial property expert to guide you on your investment journey. Benefits Commercial property investment done right tends to have a better ROI (return on Investment) of around six to twelve percent than that of private single-family properties which sit at around one and four percent. Commercial leases are generally longer than those found in residential real estate which turn means that there is less tenant turnover. A highly regarded advantage of commercial real estate is more consistent stream of income due to long leasing periods, and commercial building tend to have more units available than residential properties which allows you in multiply your income much more quickly. Also referred to as a triple net lease, commercial tenants pay the building’s property insurance, taxes and maintenance. This increases benefits for the owner. It's suggested that commercial real estate has less competition than private real estate and is less saturated avenue for aspiring investors. This is attributed to the perceived difficulty of commercial investing, which is easy if the industry is better understood. Know your neighbours Research is paramount when determining your next commercial investment. Think outside of the building. What are the latest prices paid for recently sold properties in the surrounding area? The general rule of thumb when analysing comparable sales is to choose the closest property where the footage does not exceed 10% (higher or lower) than that of the property being evaluated. Hotspot areas for commercial property investment in 2020 are in Cape Town, Durban and Johannesburg. Urban Development Zones have emerged as gold mines for investors. Joburg’s inner-city, Durban’s inner-city and the Greater Tygerberg area in Cape Town are commercial real estate hotspots. Get out the calculator There are many numbers to be worked out and calculations involved when investing in commercial real estate. While this may seem obvious, there are specific formulas you should know when understanding real estate finance. Net operating income This calculation consists of all revenue and costs from a property. This total is configured before taxes and provides investors with an idea of how much they’ll make from an investment, minus all the necessary expenses. Operating costs consists of things such as insurance, utilities, repairs and maintenance, management fees and property tax. Capitalization rate This is used to calculate the value of income-producing properties and provides investors with an estimate of cashflow and future profits. It’s essentially the ratio of net operating income to property asset value. Cash on cash This measures an investor’s return on the commercial real estate transactions, typically used by investors who rely on financing to purchase their properties. It measures the cash invested relative to the amount that was financed and in turn will provide an accurate account of the investment’s performance. Commercial real estate can be a rewarding and exciting journey when it’s done right. Due diligence is key to a successful investor. Think of this investment venture as a research project, as the more you know, the more successful you’ll be. One thing is guaranteed; every investment is accompanied by an element of risk, but with no risk there can be no reward. STEP-BY-STEP GUIDE FOR INVESTING Incorrect valuations: It’s important to account for variance that may be found in each asset. Commercial investors need to be in know regarding what they are buying and the cost. Financial ignorance: Commercial sales are not the same as residential ones and investors need to understand this and how it affects the financial intricacies such as loan-to- value (LTV) or debt service coverage ratio (DSCR). Neglecting due diligence: More investors need to put time into learning as much about a property as they can before partaking in any financial transactions. Doing it on your own: Too many investors look to save money by doing everything themselves. Working with a (competent) team may save you money and time in the long run and they may more know about various processes than you do, making everything more efficient long-term. SOURCE Standard Bank Group, Greater Tygerberg Partnership, Fortunebuilders SA Real Estate Investor Magazine FEBRUARY/MARCH 2020 41

Real Estate Investor Magazine South Africa February/ March 2020 | Page 43