Is Commercial Property an Effective Wealth-building Tool?

Commercial property is a major asset class in the real estate category, especially in Cape Town, where a surge in office, retail, and warehouse space has still not managed to fully meet renewed demand for premium and innovative commercial spaces.

While tenants search for the ideal Cape Town office rental or warehousing space to help grow their businesses, the very same premises can act as a lucrative source of income and appreciation for savvy investors.

With attractive potential returns, commercial properties can often outshine their residential peers, but as with any investment, there is upside and downside potential to consider when managing risk at the outset and during the full term of the investment.

If you’re considering a Cape Town commercial property investment, there are several key pieces of knowledge that you’ll need to have in place before you can make the best possible financial decision.

Let’s take a look at the essential aspects of investing in office or industrial premises.

What makes Cape Town commercial property such a unique asset class?

Investors are faced with a large selection of potential assets when deciding how to allocate their capital and understanding the ins and outs of each one is essential to make the best possible investment decision.

The following categories of assets have proven to be extremely popular with investors over the years:

Stocks and securities
The bond markets
Money market accounts and high-yield investment savings instruments
Residential rental properties
Commercial rental properties
Business ventures
Art, antiques, and collectibles

Each of these asset classes comes with its own unique blend of risk, potential returns, and cost of acquisition.

Furthermore, liquidity is a major consideration when it comes to investments, with money placed in a fixed deposit or money market account being easily accessible, and funds tied up in a property or piece of art potentially taking several months to sell – at a price that will need to be negotiated between buyer and seller.

Fundamentally, investors will tend to gravitate towards an asset that offers superior returns compared to other asset types of a similar risk level.
For this reason, property investments and stock portfolios tend to produce higher returns on average, but also present the potential for an annual loss.
This is in contrast to money kept in relatively safe bank accounts, which accrue lower interest in exchange for a lower risk profile.

Commercial property investment differences v risks

For investors comparing commercial property, residential property, and intermediate-risk stock investments to decide which asset offers the best prospects, the following generalisations hold true:

The annual return on commercial property is usually higher than that of residential property. Commercial properties in South Africa tend to return 11%, compared to 5–6% on residential units.
In contrast, a typical JSE-diversified portfolio will usually return somewhere in the same range as that of residential property (7% or below), but with the advantage of increased liquidity since the portfolio can be sold at short notice.
It should be noted that dividends and gains on equity portfolios attract tax rates of 18% for individuals and 21.6% for businesses.
The South African Reserve Bank announced a repo rate cut on 18 September by 25 basis points to 8% per annum which brought the prime lending rate down to 11.5%, breaking a four-year stint.

The Momentum Investments Group predicts a “further cut of 25 basis points in November and two more cuts in 2025. Albert Botha, head of Fixed Income commented that “lower rates typically benefit riskier asset classes such as property and equity, particularly if South Africa’s socio-economic circumstances continue to improve”.

Investors who would like the benefits of property investment with the enhanced liquidity of a stock portfolio can opt for REITs (real estate investment trusts), which invest in selected commercial property buildings throughout the country.

In addition to appreciation, however, a commercial building, warehouse unit, or retail space offers the potential for regular rental income from tenants.

This should be counterbalanced against the potential for liabilities, as well as maintenance, security, and other running costs, which ultimately become the responsibility of the owner.

Beat the average: securing and financing a property the smart way

By now, it’s clear that commercial property, with its 11% average Return On Investment, may be the ideal choice for investors looking to diversify their portfolios.

Compared to the 5%-7% average returns on residential properties and the JSE, 11% could provide a doubling of your investment in under seven years.

That being said, the prices of commercial properties are generally higher than those of their residential counterparts. In addition, potential buyers should bear in mind that the financing process is rather different than that of a home.

While residential property bonds can often extend to 100% of the property value, banks will usually only lend up to 75% for a commercial property purchase.
The repayment period on a commercial property, which is typically 10 years, is far shorter than a home loan which can extend to 30 years or longer, depending on the circumstances.

Overall, the process of buying a commercial property and realising substantial gains from it requires healthy cash flow from day one. In this way, the higher financing instalments can be met during the first decade of ownership.

After this initial front-loading of payments, however, a well-managed commercial property can become an extremely lucrative source of income for its owner, increasing in value as market conditions improve in line with economic performance.

Working with an experienced area specialist like the ones you’ll find at Commercial Space could help you to beat the return on investment of 11% for the commercial property sector in several ways:

Price of acquisition: An experienced agent can negotiate on your behalf to obtain the best possible price, despite the city’s extremely tight market characterised by low vacancies.
Maximum occupancy rates and competitive rentals: By marketing your property with an experienced agent, you can enjoy a high occupancy rate in Cape Town with monthly rentals that reflect the desirability of your building among business tenants, with the potential for healthy annual increases.
Multiple income streams: If you plan to acquire a mixed-use building, a team of agents with experience in office space, retail, and industrial fields could be indispensable in securing tenants seeking specific properties in these categories.

With the right approach, you could expect to obtain a return on investment in excess of 11%, resulting in an effective doubling of your investment every 10 years. This would free up additional capital for further investments, allowing you to diversify your portfolio for an even greater compounding effect.

Find your ideal Cape Town Commercial investment with us

If you’re excited at the prospect of acquiring Cape Town commercial space for wealth creation purposes, look no further. The Commercial Space team has decades of collective experience matching buyers with highly marketable office, retail, and industrial buildings in the Cape Peninsula.