Business & Economy

Sunday, 24 July 2011 22:25

Why residential investors are migrating to commercial property

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SA investors have been forced to look at the unsung heroes of investment returns in the last eighteen months, and, among them, one star has emerged from the shadow of its former ‘competitor’ and predecessor. The average growth rate over twenty years achieved by property in various interest rate scenarios comes closely behind equities when compared to other investment vehicles. Property would yield a higher return when the full benefit of the gearing factor associated with property investment is included. This fact is known by many, but, in light of the fact that residential property has been forced to take a back seat in the current climate, do lucrative property returns still hold true?
With sensibly applied gearing, commercial property is where wealth has been created in the past, and once again steps boldly into the limelight. The same principles apply, in that a successful property investment is based on location and, thereafter, timing. But how does a property investor understand and seize the opportunity within this lesser-known, but currently more attractive, market?

Horizon Capital, a boutique corporate finance and asset management house, specialises in commercial property investment for high net worth clients. John Witter explains, “You need to know the facts first. Historically, commercial property has achieved yields almost twice as favourable as its residential counterpart. Not only are returns higher, but lease periods tend to be longer, tenants more reliable and rental income better-secured. Once you have that assurance, you need a specialist.

Horizon Capital focuses on newer commercial properties in high growth areas, as opposed to residential due to the higher rental yields and longer leases. We’re well placed and well timed right now.”

He adds, “The one significant set-back to commercial property investment, however, is the larger deposits the banks require, so it may be more realistic for first-time property investors, new to the working-world, to start out in the residential market.”

With some banks offering 100% finance packages to first-time property buyers and the expectation that banks will further relax their lending criteria to these new investors, residential property is arguably the place to get a foot in the door. Once sufficient equity has been created through residential property it is a good idea to graduate to commercial property investment.

“If the main contributor to successful property investment is the type of property acquired, followed by the location in which it is situated, then the third and final factor is timing. Property investment works in cycles and with the prediction by experts and analysts that the economy will start returning to growth in the final quarter of this year, now would appear the ideal time to invest in the property sector as we may be at the end of the downturn.”

Whether you’re a recent university graduate looking to invest in your first residential property, or you’re a seasoned property investor wanting to benefit from graduating from the residential to the commercial market, with the upturn in the property market on the cards, this is a buyers’ market and it might well be wise to take full advantage of the current conditions while they last.

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