Learning to Grow Your Wealth With Commercial and Industrial Property

Growing wealth with commercial and industrial properties can be achieved if one takes the time to learn the steps of being a good investor. Being prepared to perform the due diligence that a good investor always uses when analyzing commercial and industrial investments is critical to successful commercial real estate investing. Since knowing what you are buying is essential, you must concentrate on developing your evaluation skills. However, once you know what you want to buy, that’s just the beginning of the process. You must learn how to add value to the property through further development and be sure that you understand the financing end, as well as how to work with regional and local authorities to get the necessary permits for property improvements.

Common Misconceptions
Most people mistakenly perceive commercial real estate as the hardest arena in which to do business. However, you’ll be pleasantly surprised to know that the commercial arena:

• Is the easiest to structure great deals
• Allows you to complete deals and structure them with seller financing, faster and easier than most residential deals
• Is often easier to obtain commercial property financing, because transactions produce cash flow

Banks look at commercial financing as an entirely different financial world. They expect to see a profit and loss and a financial or income statement on the property. Although they look to the investor for some degree of creditworthiness, they also look more keenly at the deal and at the property itself, which greatly facilitates your ability to obtain financing. With commercial property, many of these leases are two, three, and five years, instead of one year- which is common in residential housing leases- and when you own or control commercial property with solid long-term tenant leases in place you are a prime candidate for securing great financing or refinance options.

Commercial and Industrial Property – Overview

You will should explore several major types of commercial properties:

• Retail
• Industrial
• Office

In residential real estate investing, you can create income through house and apartment rentals, there’s no doubting that. However, commercial rentals are considered better investments than residential properties. You can build financial independence in the real estate commercial investing world, and with less properties and dealing with a better class of tenant.

Although you can create income through rentals, you build wealth through the appreciating factor just by owning real estate that increases in value organically over time or through forced appreciation with income and/or property improvements. Appreciation can happen in a number of other ways, too, such as tax benefits and write-offs.

You’ll also need to educate yourself about real estate investment issues such as:

• Financing properties
• Real estate cycles and
• “Hidden Market”

It’s our opinion that you can make more money in the “Hidden Market” of the commercial arena, than in any other market. “Hidden Market” properties are properties that may be for sale but are not listed.

So, it’s exciting to start to learn that commercial investing is actually, in many ways, easier than residential investing.

Buying Commercial Or Industrial Property – Lender Risk Assessment Know-How

Commercial & Industrial Buildings – New Zealand

It is a popular misconception that the same lending ‘rules’ apply when bank and non-bank lenders assess the risks associated with commercial and industrial properties, as they use with residential loan applications.

In fact, there are many differences between the risks associated with commercial and residential lending which necessitates completely different lending criteria.


One of the biggest differences is the level of debt that the lenders will allow borrowed against commercial property. While it is relatively common for lenders to borrow up to 80% of value, with some lenders going up to 90 or 95% on residential properties, the norm for commercial property is 60 – 65% of value. There are some lenders who would look at 75 – 80%, but this would depend on the lease profile and collateral security.

This means that there is a much greater requirement for larger amounts of available equity in order to purchase a commercial or industrial property.


The main reason for this conservative approach by lenders is the ‘tenant risk’. Tenants for commercial and industrial properties are businesses with their own set of risk factors.

Some obvious factors that need to be taken into consideration are:

  • Length of time the tenant has been there
  • Length of the lease

Lenders consider the length of a lease to be a major factor when assessing the lending risk. They will not favour short term leases, where there is the risk of the tenant moving out leaving a vacant property, which would seriously affect the properties cash flow and the ability to service the debt.

But other factors are also important:

  • What type of business is the tenant?
  • How long have they been in business?
  • Their financial strength
  • What is the future of the business, i.e. Is it a business sector with a future?

As property owners will probably not have access to the financial accounts of their tenants, lenders will use the length of time the tenant has been in business and how long they have been a tenant, as an indicator of their financial strength.

Tenanting a commercial property is not as easy as residential as the demand is even more dependent on location, along with the design and flexibility of the building to meet the requirements of the tenant business.


The one factor that remains the same for both commercial and residential property when assessing risk profile is the location. Good commercial locations, especially those in city centres, will carry less risk to capital protection, value growth and tenant demand, than those in less desirable locations such as regional towns or rural locations.


The Debt Servicing Criteria is also very different when compared to residential properties. For commercial properties, the rent received will be related to a multiple of the cost of debt. This currently equates to a multiple equal to 1.5 times the debt cost i.e. Loan of $1,000,000 at 7% = $70,000 – therefore rental income needs to be in excess of $105,000 Per annum.


Commercial property can be a good investment if you understand the risks associated with this type of asset and the manner in which the Banks assess the risk.

Our key recommendations:

[1] Before you make an offer to buy a commercial or industrial property enlist experts in this area; including legal, accountancy, commercial property agents, financiers – all who understand this market to ensure you get the best possible advice before you make a commitment to invest.

[2] Research, know and understand likely tenants, their industries, location and local activity, and all associated ongoing financial commitments.

The Industrial Property Development Market – From Bust to Boom

Historically the property development market in South Africa has been vibrant. But when the current world economic slump began to take hold back in September 2008, it drained the confidence out of many investors and the market nose-dived along with the general economic situation. But with the signs of economic recovery beginning to take hold again, what prospects are there for a resurgence in the industrial property market?

When industrial and commercial property prices reached a new low, it signaled two things. Firstly that the market was severely depressed and was likely to stay that way for several years, but also that the bottom of the trough had been reached and that the only way out, was up. With the market having stabilized at its new low, it meant that the glut of distressed properties that had been pouring in had stopped, and with the laws of supply and demand in operation, with the excess of supply far outstripping demand, prices remained depressed.

However, the last 12 months has seen the signs of recovery taking place in the commercial sector, and with property prices still artificially low, this has begun to stimulate demand, as property development speculators are one again sensing the opportunity of making good short to medium term returns on new investments.

Office properties in particular are a good example of the current optimistic outlook. With economic forecasts being positive, albeit slow-moving, and prices being as low as they are, now is a good time to buy. As confidence returns to the economy, the potential for new letting agreements is rising and properties are once again beginning to move, bringing about a slow but steady rise in prices and rates. It is forecast that this trend will continue slowly but surely, depleting the supply surplus which will eventually trigger a new bout of property development taking place.

Current thinking is that this may well lead to an industrial property boom in 2014/15. Of course with such a long gestation period for new developments to come to final fruition, the process needs to be kicked off now. Feasibility studies, surveys, finance – all of these things must be in place before actual construction can begin to take place.

From a national point of view, the South African government already has its policy in place and several IDZs, (industrial development zones), are already planned and underway. The private industrial property development market is also getting its house in order, and many new private developments are in construction with many more at the planning stage.

All in all this is now a very positive time for property development. Industrial property investors have every reason to be cautiously optimistic, as the short to medium term prospects are looking very positive, and now is the time to speculate and invest.