Investment in Commercial Property – The Mentor Group

What is Commercial Property?

Commercial property is a real estate property which is used for business purpose. A commercial property mostly refers to buildings that provide space to businesses; it may also refer to the land which is intended to generate profit. The commercial property had many implications such as financing of the building, the tax treatment and the laws implied to it.

Investing in Commercial Property?

The key considerations for investors before investing in the commercial property should be through a rigorous assessment of their investment horizon, risk-taking capacity, the purpose of investment in commercial property (diversification, long-term investment and rental return).

It is important to consider the location of the project, project quality, lease covenants (rent, lock-in period, escalation, etc), micro-market performance and benchmarking before planning to invest in the commercial property. It is important to see whether the micro-market is preferred by a diverse occupier mix or a specific industry, this will be useful if the investment is in the future project of commercial property with no pre-leasing activity. Stable income-generating office assets must be a priority for regular income stream requirements, while few risks can be considered for future commercial projects based on the capacity to risk of the investor.

From the perspective of investment in commercial property which is traditionally been seen as a sound investment. The initial investment costs of the building and costs associated with the customization for the tenants are usually much higher than the residential real estate. It is known that the overall return is also higher and some of the common issues that come with tenants are not present when dealing with a company and clear leases

An investor in commercial property can also utilize the triple net lease, where the risks are shifted on to the leasing business to the extent that is not available to residential property investors. Commercial property tends to have a more straight forward approach towards pricing. A residential real estate property investor should look to several factors, which include the emotional appeal to a property perspective of tenants. In contrast, an investor in commercial property will have income statement which shows the value of the current lease, which can be easily be compared to the rate of capitalization for the rest other commercial property advantages in that area.

If one wants to invest in commercial property but they do not have the financials or the willingness to purchase the whole building, real estate investment trusts (REITs) can achieve this with better manageable sections. Real estate investment trusts operate and function like mutual funds where they pool the investment money to purchase the assets and the shares of the real estate investment trusts themselves go for the trading instruments which represent the underlying assets. Real estate investment trusts specializing in commercial properties that offer the shares to those investors who are willing to raise the capital to purchase a portfolio of income-generating commercial property. Investors can buy and sell these shares on exchanges, buying shares in the commercial property real estate investment trusts gives investors exposure to commercial property without the need for buying the building of their own.

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