To get the most out of your commercial property investment, your asset needs to be relevant. Here’s how to achieve strong capital growth in commercial real estate.
Many new commercial property investors forget that there is significant capital appreciation on offer during the lifetime of their investment. Sure, most investors (like us), pursue commercial real estate investments with passive income as the priority. But there is nothing quite like increasing – say, even doubling – your capital investment.
But the question is, how does one achieve significant capital growth in commercial property?
It doesn’t come by sitting, waiting, and hoping your asset will grow in value. Time in the market will certainly increase your chances of capital appreciation, but real growth, achieving jaw-dropping capital appreciation, comes from thorough detective work and the willingness to get your hands dirty.
Here’s how we achieve capital growth in commercial property investment.
1. Identify undervalued property
Undervalued property has high potential to make an excellent investment, no matter what part of the economic cycle a particular market is in.
The potential for good capital growth in commercial property investment is typically found in these two scenarios:
- An undercapitalised asset that is probably being used for the right purpose but is not being used correctly. Locating a property like this enables you to add value to the asset with appropriate improvements (i.e. adding an extra storey, extending floor space, improving signage).
- A property that isn’t being used for the right purpose. Investors can capitalise on the opportunity to repurpose this sort of asset by bringing in a tenant who will use the premises in an optimal fashion. These properties aren’t necessarily undervalued, but are underutilised.
We recently sold an industrial property at 50 Arc Place, Larapinta QLD for $14 million. It was purchased two years earlier for $7.86 million. How did we achieve a $6.44 million increase in such a short period of time?
Well, there were many actions we took. But one notable element was building 1,800sqm of additional hardstand on the premises (to suit the tenant’s specific requirements). This project alone increased the property value by $600,000. The property was underutilised, and an initiative to ensure almost 2,000sqm of space served a purpose for our tenant saw huge capital uplift for our investors.
Learn more about 50 Arc Place in our case study here: How we safely doubled our investors’ money in 2 years
2. Leverage on a property’s lost relevance
The common thread between these two above scenarios is the assets have lost their relevance. That’s where the potential profit lies.
Opportunities for capital growth in the second scenario (a property that isn’t being used for the right purpose) typically occur through a property’s gentrification.
We once purchased a large format retail asset in Tuggerah, New South Wales. The property was supposedly overpriced because it was directly across the road from a Supa Centre (and so had lost some of its relevance). Yet we managed to provide a 40-per cent return to our investors in just 18 months by squeezing the most value possible from the asset.
Some people told us Tuggerah was the wrong location to invest in, but it was actually the perfect positional play. We identified a small window of opportunity to activate redundant lettable area in a neglected asset. We added value and made the location more attractive to potential tenants. We leveraged on a property’s lost relevance and achieved significant capital growth as a result.
Learn more about our Tuggerah success story here: 40% return in 18 months: Our Tuggerah success story
3. Always return to property fundamentals
Regardless of the economic activity in any particular market, property fundamentals tend to remain.
A good investor will identify an excellent opportunity in any economic climate; it’s all about what makes a property relevant.
Being able to recognise robust commercial property investment opportunities takes expertise and entrepreneurial vision. That’s why so many of our investors choose to invest alongside a professional commercial property investment syndicate.
Properties & Pathways is a dynamic commercial property investment company. Our completed syndicates have provided investors an average annualised return of 19%. For more information on how you can invest alongside us, get in touch today.
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