Are you thinking about investing in your own commercial property? It may be exciting but, at the same time you must be aware of the risks involved in making a business investment.
Property investment is like a rocket science which requires a good understanding of how the property market works and find out the reasons why it fluctuates.
Only by understanding the risks involved in the investment you can start building the strategies to combat the risks and ultimately make your money safer. Let's closely examine these risks and move wisely before making any commercial business investment.
Location of the Property
Before you invest in a property, especially for commercial purpose the prime concern is the location in which the property is situated. The value, appeal and reputation of the location where the building is situated will fluctuate according to the market value or according to the prominence of the area.
This will result either in a positive or negative way. For example, if your building is situated in a particularly run down area that needs a facelift, then you may benefit from it as new visitors will be attracted towards the area.
Alternatively, your business may seem to be behind the times if the area is being renewed and your store/building premises does not match up with the latest change.
Characteristics of the building
Characteristics of the building such as the technologies implemented and the design used etc. will come into consideration when your clients think about utilising your building spaces.
As the needs of clients change over the years it will affect the value of your property too. For example, if your building is not equipped with under-floor cabling, it may not attract tenants looking for an office building.
The overall design of the building will also influence a tenant’s decision to lease your building. If it looks outdated or particularly run-down compared to the buildings in the surrounding area, you may not attract as many prospective tenants. Furthermore, the materials used and layout of your building will be a factor that a tenant will take into consideration.
Income from Tenants
Another major factor in deciding the value of a building or property is how much income it can give for its owner. If a tenant’s credit quality weakens it can affect the buildings sales value too.
Period of Lease
If a tenant has leased your property for an extended period of time, the resale value is generally safe. In contrast, if a tenant is set to move out whilst you are trying to sell, prospective buyers are less likely to commit time to filling your property.
The factors in a property market can affect the property you're going to invest as it responds to what is happening in the economy. The commercial property market can grow very fast leading to oversupply or grind to a halt leading to undersupply. Therefore, it is important to understand that growth cycles will happen which will lead to oversupply resulting in market weakness and stabilisation will occur when tenants occupy vacant space that lead to lack of premises to hire and so forth.
Risks by the Property Industry
Every property is part of a business sector, an example being a shop, warehouse or office. Property sectors perform differently from the property market in general, the same way business sectors in the economy behave differently.
For example, towards the end of 2018, house prices fell by more than £5,000 on average in November, sliding fastest in Britain’s wealthiest towns as Brexit uncertainty gripped the property market. This can be said as one of the largest drop in prices since 2012. The average price of property coming to the market was down by 1.7%, or £5,222, in September alone. The biggest falls were in London, where the typical asking price fell by £10,793 (a fall of 1.7%) and in the south-east of England, where prices were down £8,647 (2.1%).
It is a good practice to spread your holdings across different sectors so you essentially reduce the risk of being hit by economic decline in a single sector.
What you can keep the risks at bay?
While you plan to invest in a commercial property always have some money put aside so that you can use it when things goes wrong.
One thing you must always keep in mind is, your investment will face risk when tenants stop paying you rent. It will almost put a hold on the loan payments if any, meaning your investors would lose money and possibly a large part of their capital.
Considering these factors well and in advance, you can start looking at how to invest in a commercial property safely and securely. The above risk factors can guide you better to hugely minimise the risks on investing in a property.