Commercial property buyers need to become value investors if they want to see above-market returns.
While the past few years have shown good capital appreciation and income returns for most industrial and commercial properties, this might not continue, warns Tony Bales of industrial property broker Epping Property.
The market has changed, so wise investors need to seek properties that will grow at an above-average rate if they want decent returns.
Bales says value investing is investing in a property that has been undervalued or where one can purchase the property at a below-market price.
“The specific benefits are an above-market appreciation in either the capital value or rental income or both... Understand the difference between price and value. Price is what you pay, value is what you receive.”
Buying investment property at too high a price is the “surest way” to limit future returns.
“However, commercial property can double or triple in value for an investor who can spot a value purchase.”
Finding properties that offer value can involve sifting through many options. It is a three-step process, Bales says.
* Spot hidden growth potential. Does the property offer underutilised space that can be developed? Is there parking that can be leased out for night parking if close to restaurants? Can large empty office spaces be divided into smaller units to meet market demand and reduce vacancies?
* Develop a strategy to unlock that untapped value.
* Execute your plan.
What is value for one investor might not be value for another. Bales says a passive investor can offload a property to someone who has the capacity, time and inclination to develop it and unlock its potential value.
“Investors have different profiles, such as knowledge, capacity, skills, so ensuring constant value arbitrage in the commercial and industrial property market.”
Among the questions buyers should ask are:
* Do I have an excellent understanding of the property I want to buy?
* Does the purchase price offer upside potential?
* What is it about this property that will ensure its value grows faster than other properties?
* What do I need to do to ensure this potential value is unlocked as soon as possible?
He says the highest returns come from buying commercial investment property at a price that doesn’t reflect its inherent attributes. Value investors follow strategies to find, and mine, those features.
“The key here is to understand exactly what value is for oneself. The greatest value investor, Warren Buffett, did not buy any technology shares during the boom in the late 1990s - a move for which he faced major criticism. However, his actions were well rewarded in the end as today he is one of the wealthiest people in the world. And he now has tech shares in his investment portfolio.”
It is also important to distinguish between the listed property sector and investing directly in physical property.
“The listed property sector has had a torrid past 18 months. Investing in listed shares is different from investing in specific physical properties.
“It is vitally important to understand what the drivers of the listed property sector are versus the drivers of physical commercial and industrial property. Value investing in the listed property sector is different from valuing investing in specific properties.”
Also, investors must see the value concept as one that has no borders - what might seem overpriced to South Africans might be value for international players due to the higher yields.
“Conversely, when the US dollar strengthens, we must expect the SA property market to offer less value than more developed countries, and hence, investors will move funds to those countries that offer them more perceived value.”
Bales says the most successful commercial property investors in the next 24 months are going to be focused, knowledgeable players who exploit the concept of value investing. “As Warren Buffett says, be a property analyst, not a market analyst.”