Have you ever considered investing in commercial office space? Most real estate investors focus on residential because commercial is typically where larger companies specialize especially in markets outside of Hong Kong. However, there are opportunities in the strata office space where an investor can buy a single office unit in a high rise office building.
Below, we’ll discuss what you need to know to invest successfully in a commercial office property in any city.
Location – Properties in excellent locations will typically be in high demand because occupancy rates are higher and are able to attract quality tenants. An office property that is considered well-located will include: i) close proximity to the business district and mass transportation, ii) variety of amenities in the area such as restaurants, shopping, fitness, and green space, iii) nearby developments and properties in the area.
Income Potential – Depending on location, a commercial office could have an annual return of 2% to 12% which is a much higher range than what is typically found in residential properties.
Valuation – The value of the property is easier to objectively calculate than residential properties and is usually calculated in agreement by these parties: the existing owner, a 3rd party appraiser, and the lender. Value is calculated based on the current and future net income of the property.
Triple Net Leases – In this type of lease, the tenant will pay all expenses including: utilities and property taxes. This lease is very favourable to the landlord as they collect & keep all the rent.
Professional services required – To get a mortgage and lease the space, a broker is usually required to ensure a smooth transaction process. Once the space is leased, a management company will be needed to manage the property. If renovations are required, then the landlord will have to hire a contractor to carry out the work.
Getting a mortgage – Lenders will typically lend 65% loan to value. A buyer should be ready to provide at least 35% of capital for the down payment and fees. Terms are usually 5 years or longer with amortization periods of 25 years or longer.
Quality of Tenant – High quality properties in a good location will attract higher quality tenants. This lowers the risk of vacancies due to the increased demand for high quality office space.
Regulation & Taxes – A huge benefit of commercial property investing is that there are usually zero foreign buyers taxes. However, due to the specialization involved, professional services are required to execute the transaction like we mentioned above.
Liquidity – The buying & selling process is typically longer than residential because of the limited pool of buyers.
Opportunities: Our team is currently working on a strata office investment opportunity in Vancouver. Contact us today to learn more or look out for future posts & videos where we provide more detailed information.