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Until the last few years, real estate in general was a great investment. Then along came the global economic crisis and associated recessions in many countries. Real estate prices dropped dramatically and are still nowhere near the value they were at the height of property prices in 2007.
Commercial real estate has suffered in a similar way. More recently, the UK economy has contracted in each of the three quarters through June 2012, limiting demand for goods and services and restricting commercial landlords? earnings. A lot does depend on where the commercial premises are situated ? for instance shopping centre rents (not including the south east of England) fell 0.4% in September 2012, whereas the values of London?s West End office premises rose by 0.3% in September 2012 and Central London retail premises rose by 1% during the same period (source: IPD). These figures are calculated on 3,559 property appraisals.
So, how can you make money in commercial real estate these days? Basically, the answer is in much the same way as investors have always made money.? There is about ?762bn of commercial property in the UK, about 80% of which are shops, offices and industrial units.
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If you are considering buying a commercial property, the following are points you should consider:
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Prepare yourself
If you are inexperienced in commercial property investment, you must do your homework.
- Examine the types of commercial premises available and select those with the greatest potential
- Calculate the long term potential for profitability ? resale, rent etc.
- Study the economic cycles to determine whether this is a good time to invest
- Ensure you understand the tax implications
- Be prepared to negotiate and close the deal, ensuring you have your finance in place
- Decide whether you want to manage the premises yourself or use a management company.
Undeveloped Land
Investors who buy undeveloped land outside towns and cities have to spend to develop the land into commercial or residential premises to gain from future appreciation. For commercial real estate, the most likely and profitable use is for out of town shopping malls and industrial estates.
Buying developed commercial premises
When buying a commercial property, the buyer must decide whether the area he/she is considering is likely to become more popular, eg a car showroom where there are others already located there. However, high demand means higher prices, but may still be profitable in the long term. Remember that location, development and improvements will provide a higher yield. Inflation can also be a factor, especially if a piece of land has been owned, but not developed over the years. The owner will make a good profit if he sells it in the current market, having benefited from years of runaway inflation ? but the new buyer will have to pay the market price.
Rent
When you own land which is used for retail or commercial use, you will charge rent to the businesses located on your land. This can include rent for agricultural purposes, access roads, pipelines etc. There is also the possibility of tenants paying an additional amount to ensure they have first refusal on an adjoining unit or land. There are still bargains out there if you look ? eg foreclosures, government surplus, leasebacks. It does not have to cost a fortune to start your portfolio of commercial properties. You just need to do your homework and get as much advice and guidance as possible. Do your market research to check that there are potential customers for your investment.
Risks
As well as the potential for profit over time, commercial investments carry a similar risk to other real estate. Potential investors should seek guidance to understand how commercial ventures work and all the implications involved before doing anything else.
Why should small investors buy commercial properties?
Although many small investors tend to buy properties for development and rental nowadays, interest is growing in commercial premises. This is mainly because they have performed reasonably well in these harsh economic times. Many small investors are looking to buy commercial properties as their future ?pension pot? as traditional company pensions become more unstable and insecure. There are also investors who form syndicates with like minded people to buy commercial premises, sometimes as a result of redundancies at their former workplace.
?If you are still hesitant, remember that real estate is a better long-term investment than the stock market.
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This article was written by Endre R, representing ?company formations 247. They provide assistance for company formation and also offer full business administration services including registered offices and nominee services.
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Source: http://www.thenichereport.com/uncategorized/how-to-turn-a-profit-in-commercial-real-estate-in-2012/
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