How to select the right Commercial Asset for investment?
We all know that location is
one of the most important aspect of real estate. As an investor one needs to
invest in growing market with planned development of infrastructure. But it is
also important to evaluate a commercial property on the following parameters
for investment purpose:
Yield Rate: This
is the one of the most important factors to be assessed. One needs to
understand current yield rates of the subject, market for comparable properties
and likely movement in future. Also, if we are computing Gross Yield [Gross
Annual Income/ Price] or Net Yield [Annual Net Operating Income (NOI)/Price].
Annual NOI is Gross Annual Income minus all operating costs; operating cost
includes property tax, sinking fund (for structural maintenance expenses),
insurance, vacancy costs and others. Generally, difference between Gross Yield
and Net Yield is 1%.
Market
Conditions (Ongoing Rent, growth rate, overall vacancy levels): It is
important to assess the current rent of the offered property in comparison to
market rent levels. If the property is signed above the current market rental
then in future it is likely that tenant may renegotiate with the owner & if
it is below market rent levels then possibility of higher yield in next lease
cycle. One needs to look last 5 years’ rental growth patterns, absorption
levels and vacancy levels of the micro-market; also the forecast for next 3-5
years for the same.
Quality of
Tenant: (Category of Client; investment made by tenant):
Quality of the current tenant is an important factor. If the property is leased
to Fortune 500 companies then it enhances the value of the property and
leverage capability. If the Client has invested on fit-out and other
improvements on the property, then it is likely that the tenant will continue
in the property for longer term.
Quality of
Building: Grade of the building play important role in the
property valuation. The property with good floor plate, sufficient car parks,
good design and amenities has longer economic life. Also, the current status of
the property is an important factor to assess. It can happen that the major
maintenance expense is due in short time and this needs to be considered in the
valuation of the property.
Lease terms
[Lease Term, Lock-in Period and others]: One
should read the lease very carefully while investing into a leased facility.
The parameters to consider are lease term and lock-in period but there are
other terms including status of the facility at the time of exit of the
property and others.
Adherence to
the Regulations: It is important that the property is
legal and built as per the local laws. One needs to hire a good Due Diligence
firm to understand the risk if any with the ownership of the property.
Therefore, it is advised to conduct a detailed due diligence on above listed parameters before investing in a commercial real estate assets.
