Commercial and industrial property investment trends have shifted, with investors now seeking specifically sited properties for above-average growth rates.
Epping Property industrial property broker Tony Bales hails this move as “the age of value investing” as the market has changed from the days when physical industrial and commercial properties showed sound capital appreciation and income returns. During those years, investors purchased any available property, confident it would produce sound yields, but Bales says this will not always be the case.
“Value investing means investing in under-valued property or where you can secure property at a price below market value. The benefits are an above-market appreciation in either capital value or rental income, or even both.”
Finding properties offering this value may involve sifting through a host of opportunities. Bales says what one investor may deem as value will not hold true for another. A passive investor may unload a property to someone with the capacity, time and inclination to develop it and unlock its potential value. Investors have different profiles that ensure constant value arbitrage in the commercial and industrial property market.
“It is important to distinguish between the listed property sector and investing directly in physical property. The former has had a torrid 18 months and it is vital to understand its drivers versus those of physical commercial and industrial property,” Bales says.
Value investing in the listed property sector differs from value investing in specific properties. Determining an appropriate value purchase initially demands understanding of the difference between price and value - the former being the amount that changes hands and the latter the value received from that transaction. Paying too high a price for an investment property is not good value.
“However, commercial property can double or triple in value for an investor who spots hidden growth potential, develops a strategy to unlock that untapped value and executes the plan. The highest returns come from buying property at a price that does not reflect its inherent attributes.”
Another key aspect is broadening the mindset to view value without borders. What may appear overpriced to South Africans might be value for international investors given the higher yields. When the dollar strengthens, the local market will offer less value than more developed countries.
Questions buyers should ask:
Do I have an excellent understanding of the property I wish to buy?
Does the purchase price offer upside potential?
What is it about this property that will ensure its value grows faster than others?
What do I need to do to ensure this potential value is unlocked quickly?