Commercial Real Estate

Commercial real estate has typically represented an important segment of most professional investor’s portfolios and one that can be relied upon to offer a significant yield year after year.

Commercial Real Estate comes in many forms including:

• Office space
• Factories
• Retails outlets
• Industrially zoned land

Depending on the global or even regional area, commercial investments are born. In some developing countries such as China and India, industrial land leads to factories then to retail and finally office space.

But this is not always the case! Previously established areas occasionally need revitalising and this can change the dynamics of the investment very swiftly.

Docklands in London is a prime example;

Disused warehousing waterfront docks were slowly transformed over some 30 years, from a disused and ugly part of the city, into one of the most sought after addresses in the capital, both for commercial and residential purposes. Some warehouses were restored and converted into flats, whilst others were raised to the ground and completely redeveloped.

Commercial real estate is a firm favourite with many Real Estate Funds; by investing in a numerous locations within a given zone, funds are named and fingers are crossed as the “calculated” basket of investments hits the market. During a bull market, where developments are increasing at break neck pace, rewards are relatively easy to attain, but when the market begins to falter these fund managers in charge are often the last to know/realise/act upon the financial situation.

Even today, as the property bubble of the world continues to ravage many sectors of the world, fund managers are encouraging investors to put their money into markets that have already been hit by sliding prices. The residential market have seen fantastic growth in several countries, but as supply overtakes demand and costs no longer make them viable, it is common sense to view certain commercial investments with a wary eye.

Florida in the United States is the perfect example of this. From 2000 through 2006, new properties were being constructed on virtually every piece of empty land. Land banking concepts had disappeared, as the multitude took mortgages that were unaffordable, construction companies borrowed huge sums in order to purchase their next development.

With every new 20-30 communities, came a new shopping mall, complete with banks, clothing, restaurant chains and various other retail outlets. Office space was required to house the new companies and manage the new industrial vitality that this dreamlike state had brought with it. However, with this concept came a problem! Florida is a holiday destination, a place where an average of 80 million tourists comes to visit every year. These people are not residents! They don’t work here, they don’t live here…..they play here!

This meant that the malls were empty, offices unrented and industrial space unused. Then the bubble burst. Home owners were not buying, banks were going bust and people were being laid off from work. These new commercial areas became ghost towns and investors who didn’t have the foresight to get out of their investment ended up with upside down loans and a lot of sleepless nights. The strange thing in our eyes is that the minute the residential property market faltered, the first warnings to the commercial investment sector were being shouted loud and clear to all that would listen. But what happened? Investors continued to put money into these projects and builders continued to construct them. The frightening thing is it was only in 2009, that the markets started to have concerns about the commercial sector; over 2 years after the first warnings went unheeded.

Is commercial real estate still a good investment? Yes, of course it is, but only for professionals who understand the new dynamics of the game. Places like the BRIC countries and even some of the MAVINS hold great potential for the next few years. Even established countries in Europe are “peaking” our interest as manufacturing and industry expands and in some cases “returns home”.

Commercial real estate is a long term hold and one that can stabilise a portfolio with regular profits without excessive risk in many cases.