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When to Spend on Your Commercial Property

13 November, 2018
Categories: Commercial, Investments

Investment in a commercial property doesn’t stop after it’s purchased. Successful commercial property investment is usually about adding value.

When you think about investing in commercial property, it might be the acquisition itself you have in mind. But that’s far from the only consideration you should have. Especially if you want to be successful in commercial property investment.

You might also need to calculate when to spend money adding value to the property.

You should understand the likely expenses needed on the property in the next 10 years before you buy. The timing and size of this budget depends on:

  • Timing of lease expiries
  • Configuration of the premises (and how suited it is to tenant demand)
  • Potential return for any investment made
  • Whether capital expenditure results in increased rent or a higher property value
  • Urgent repairs or improvements required
  • Demands and expectations of potential tenants

But to add value to a property you might ask yourself, when should improvements take place?

Adding value to your commercial property

If your property is vacant, there are two schools of thought about adding value.

The first involves asking potential tenants what they want, and then renovating. The second involves renovating right away and then attracting potential tenants.

The second option is usually the best. Here’s why:

  1. Modern, attractive buildings are easier to lease than older ones.
  2. There are less discussions between you and the tenant. And it allows you to move the tenant into the property as soon as you find the right one.
  3. If you put a blank canvas in front of a potential tenant, they tend to want everything. So, by already completing a huge amount of work on the property, it narrows the scope of their demands.

You need to balance the cost of the upgrades without the certainty of a committed lease. Investors should find that ‘balancing point’.

What improvements to make to your commercial property

When you’ve decided to add value to your commercial property investment, you need to choose the specific improvements.

You also need an intimate knowledge of what your tenants might desire if you want to get this right.

Understanding how to reflect a tenant’s needs comes down to many factors, but two are very important.

By making property improvements based on firm market research will help you cater to tenant needs. Market drivers will affect these upgrades. So, it’s important to understand and apply them where you can.

The quality of your market research will also boil down to the quality of your contacts in the industry.

It’s important to source market research from professional and unbiased sources. Also find intel from local agents in the market. So, establish these contacts as soon as possible – or find someone who already has.

Sensible property improvements VS overcapitalising

When you spend money improving a property, there’s a risk of overcapitalising. This means, spending too much money on your investment.

Your research should tell you what the marketplace wants, how much to spend and what to spend money on first.

But you should also ask yourself one simple question: what makes my property stand out?

If you have a vacant property and there are 20 similar assets in your area, what makes yours different to the rest? It could be that the property has new air conditioning or a new pylon sign standing out front. These sorts of items put your nose ahead of the rest and will grab a tenant’s attention.

The fundamental here is asking why will a tenant decide to lease your property? This is important to ask in a market with high vacancy, high supply and where your competition is rife.

You might have the best leasing agent in the world. But you – the landlord – need to show tenants why your property is more relevant to them than any other on offer.

Knowing when, where and how to spend money improving your property is a key to your success.

If you’re interested in commercial property investment, consider investing in syndicate. Get in touch with Properties & Pathways today to find out more.

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