Understanding Commercial Property Investments

Do you ever feel that you should be looking more at investments in commercial property in the saturated residential property market? If this is in your mind, you are joining the new wave of investors who wants to diversify their investment portfolio with the unstable economy.

How big exactly is the commercial property market? Generally speaking, commercial property investment is not as straightforward as residential market. In Malaysia, it is almost sure that any piece of residential property will be lapped up the moment it is launched, and everyone at some point of their life will be looking for a house of their own. Some may buy a piece of residential property and rent it out instead. For commercial properties, there are a lot of other considerations.

1. Location

Location is a very important factor when it comes to investment in commercial properties. It may be true that a lot of people are looking into creating their own business, and it will not be too hard to find someone to rent your property start their business, but if the location is not right, the chances for renting out is slim.

When you wish to invest in a commercial property, look around to see whether there are other residential properties which will support the business. You may want to take a good look at the whole development project, and check residential population surrounding the commercial lot that you are aiming for.

Also, do check if the area is a flooding area, or are there any other disadvantages. Parking space is a very important factor of consideration for any business to thrive in this modern world, and you ought to make sure that there are parking spaces near the property you wish to invest in.

2. Features

Sometimes, the success of commercial properties also comes with the features included in the project itself. For example, some properties may be managed by the developer, with facilities such as wi-fi zone, making the commercial blocks into event venues or even being selective about the types of business and brand name to qualify as tenants. Some commercial properties with such strict criteria about tenants include BM Utama in the mainland Bukit Mertajam, and Straits Quay in Penang island.

Both are project examples of two contrasting backdrop. Straits Quay is a high-end sea facing project by E&O, with very high traffic coming from its branded tenants and expensive condominiums and landed property support. Meanwhile, BM Utama is a 7-unit exclusive commercial lot owned by BM Utama’s property developer, DNP Land, and is meant to become part of the lifestyle support for the almost sold-out BM Utama. The 7 units are called The Gallery, which is available for leasing only, to ensure the quality of retailers.

3. Price

Although people are talking about market price, as an investor, you should take into consideration the price and the size of the property. It is important to note that your property lease are usually based on long term contracts, and for some cases may span for 10 years instead of the normal renewable 1 or 2 years for residential properties. Also, you need to remember that returns from residential property comes from the capital value increase, but for commercial properties, it comes from income. Although commercial properties generally will cost more than residential properties, you will still need to sieve through to see if the investment can really bring you back a good return. Is the rental price of that property able to cover the loan that you took for the purchase?

If you are buying the property for the sake of making it into a hub for your own business, then it is up to you to ensure that the business that you are going to do will bring in enough sales and income to cover for the loan repayment of the property.

Commercial property leases provides an average contracted income stream of about 7 years.

4. Ownership

When you buy any property, you need to be very clear about the type of ownership that you have. Is it a freehold or a leasehold property?

Although leasehold properties are usually released with a certain amount of payment when the expiration term arrives, there may also be conditions where the land is taken back for new development. When the lease-land period is almost reached, property prices will drop significantly.

You also will want to check on the previous ownership of the property. Most properties may have more than one owner sharing the ownership of the property, so you should get a background check about this with a trusted lawyer, also to find out if there are any underlying problems to why the property is up for sale. Make sure the property sale gets consent from all legal owners.