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Is commercial property a good investment?

Why invest in commercial property? Because it offers higher returns, but there are risks involved too. Here's what you should know before making an investment.

Invest Commercial Property

Article summary

  • Commercial properties offer higher returns than residential properties.
  • However, they do require a higher level of management, hence why it’s recommended to hire a company to manage the property.
  • Most banks will only finance up to 75% of a commercial property purchase, and will require the loan to be paid off in under 10 years (versus 20 or 30 for a home loan).

Bricks and mortar has always been a reliable form of investment. It’s less of a gamble than investing in stocks, although it may take longer to produce returns. Making the right choices is essential to ensure you make the most of your investments.

We know what residential property has to offer, but what about commercial property? Here, we investigate the intricacies of commercial property investment.

Firstly, know what a commercial property is

Commercial property comes in many forms. They include:

  • Retail buildings.
  • Industrial buildings.
  • Office complexes.
  • Warehouses.

Bear in mind the recent rise in “mixed-use developments”, meaning developments that mix residential and commercial elements. For example, a lot of modern apartment buildings include a gym and coffee shop.

The differences between commercial and residential property

  • Investing in a commercial property is purely business related. Emotion doesn’t come into it, whereas purchasing a home is about more than just business.
  • Most banks will only finance up to 75% of a commercial property purchase, meaning you’ll need a deposit of at least 25%.
  • Banks usually require commercial property loans to be paid off in under 10 years, as opposed to 20 or 30 years for a home loan.

Why invest in commercial property?

The earnings potential is significantly higher on commercial properties. The Capex rate in South Africa is currently +11% for commercial properties, versus 5-8% for residential properties.

Aside from that, benefits include:

  • Tenants are more likely to take care of the property since they are financial invested in it.
  • Tenants go home after business hours, so less chance of landlords having to deal with emergency phone calls after hours.
  • Dealing with commercial tenants is generally easier than dealing with residential tenants. Communications are business-oriented and therefore more likely to be conducted in a professional manner.

The risks

  • External factors such as economic conditions (or as we’ve recently discovered, a pandemic) can affect your investment to a greater degree than with residential properties.
  • Another complication is liability. More people visit a commercial property on a daily basis, meaning higher chance of injuries or criminal activity occurring on the property.
  • Vacancies are more impactful in the case of commercial properties, as you‘ll only have a limited number of tenants. Be sure to have funds set aside for periods with less rental income.

The issues of maintenance and public safety lead us to recommend that you hire a property management company to manage the building on your behalf. Property management companies usually charge 5-10% of rental revenue, but save you a lot of trouble in return.

Planning a commercial property investment

Naturally, the type of property dictates what variables you should be looking at.

According to an FNB Commercial Property Broker Survey for the third quarter of 2021, warehouse and industrial properties reported the highest level of activity. Industrial services can’t close down during a pandemic.

However, retail may see an increase now that pandemic restrictions are being loosened. The same survey showed that retail strengthened for the fifth consecutive quarter.

Office complexes reported the lowest level of activity. They may not be wise investment, as more people are working from home in the wake of the pandemic.

Of course, you shouldn’t just be looking at which property types get the most activity. You need to analyse on a case-by-case basis. If there’s a new residential property you want to invest in, determine whether it’s in an area that is easily accessible via private or public transport.

Industrial properties, on the other hand, should be in more remote areas so that they don’t incur penalties for pollution and noise levels.

Property investment is the way forward

Either way, property makes for a pandemic-proof investment. Commercial property has higher earnings potential but don’t forget the benefits of residential property; people will always need somewhere to live, especially in a pandemic.

Aspiring property investors are usually advised to start off in residential property before moving onto commercial property. Either way, it helps you know what you can afford.

Getting prequalified with ooba Home Loans provides you with an idea of what you can afford while improving your chances of securing a bond. Find out more by getting prequalified with ooba Home Loans.

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