Unlocking the value of commercial property investment

Established property investors looking to diversify their portfolios could reap significant rewards by expanding into the commercial side of the market, says Johann van der Merwe, Rawson Properties Helderberg franchisee and Commercial Asset Manager.

“Commercial assets are often overlooked by investors who are active in the residential sector due to a lack of knowledge on how to unlock their full potential,” he says. “There is a learning curve moving between the two sectors – commercial and residential investments have plenty of differences – but that doesn’t mean commercial investments are off limits if you’re not an expert in the field.”

While it is possible to learn the ins and outs of commercial property investment independently, Van der Merwe suggests new investors partner with an experienced commercial property broker for their first forays into the market.

“This reduces your risk by leveraging the experience of an industry specialist,” he says, “and introduces you to opportunities to which you may not otherwise have been exposed.”

When it comes to getting the most from your new investment, however, there are things an investor can do regardless of whether or not a broker is involved.

To attract high quality tenants willing to pay premium rental amounts, the importance of positive first impressions cannot be underestimated.

“If the property or its grounds haven’t been cared for properly, the potential tenant is either going to pass on the opportunity for fear of ongoing management issues, or they’re going to try to negotiate for a lower rent,” he says. “A well-maintained exterior, on the other hand, instils confidence in prospective tenants, and creates a sense of value which often allows owners to increase their financial returns.”

Net Operating Income depends on three, key factors: occupancy, rental rates, and operating expenses. By improving one or more of these factors, a commercial property can not only boost its NOI, but also increase the overall asset value.

“To achieve this, one has to identify a commercial property with room for improvement in these areas,” he says. “A commercial broker can be an invaluable asset in these situations, as their professional network and experience often makes finding and recognising these opportunities dramatically easier.”

It’s only logical that more lettable space means more rental income, which directly increases the value of an asset. Despite this, Van der Merwe reveals that many commercial properties fail to add areas like basements, mezzanines and upper floors to their GLA, essentially giving tenants free use of these areas.

“It’s very important to ensure your GLA includes all areas that tenants use,” he says. “If you can increase these areas with minor alterations, that can be a great idea as well, but the main thing is to make sure every square meter in use is earning its keep.”

Identifying a residential property with the potential for commercial rezoning can be an excellent way to bridge the residential and commercial investment sectors.

“Recognising these opportunities requires a good understanding of the underlying factors in the area, and the type of tenant the property could potentially attract,” he says. “This can be much easier with the help of an experienced commercial broker and a town planner, but rezoning can unlock huge additional value in the right place.”

In addition to basic maintenance, commercial properties also require strong management. These are a few key questions that landlords should ask themselves:

“If the answer to any of those is ‘No’, a property may be suffering from poor management,” says Van der Merwe, “and is likely performing below its true potential. Improving management operations can make an asset much more profitable, and should be a prime concern for any investor.”