Jun 27, 2018
If you are looking for a lucrative way to break into the world of investing in commercial property development, focusing on office space is a good place to start. Not only is there a real need for more offices throughout the UK, but this particular type of investment leaves a lot of room for creativity. Unlike many other types of commercial properties, office spaces can be newly built commercial buildings or can be a simpler investment in structures already standing but in need of renovation. Here is some of what you may wish to consider before investing in commercial property development for offices.
Property Development Is Often Misunderstood
When you hear the term “property development”, what comes to mind? Most people think of new construction when they think of property development, however, developers also have a huge portion of their business that involves repurposing existing structures to meet needs within a community. With such a growing need of office space, commercial property development can be quickly filled once complete. This is one of the major considerations when seeking to develop properties. Is there an existing structure which can be renovated and repurposed quicker than a new build from the ground up?
In addition to the cost factor is location. Sometimes a commercial building is sitting idle in a part of a city in desperate need of offices. Not only would the cost of demolishing that building to erect a new one take away from potential profits over the long term, but it would also add to time from start to finish. Realising any revenue whatsoever would be months, if not years, down the road and that would not be as cost-effective as repurposing the standing structure for use as office space.
Financing Is a Major Concern
There are few property developers with the capital to begin new, largescale projects. This is where another major decision needs to be made. What kind of funding is best suited to your needs? While you can take out construction or business loans, sometimes it makes more sense to find a joint venture financier. This is where two or more parties agree to invest from their own resources to accrue the funding needed to develop the property. Instead of going into major debt with traditional commercial loans, the partners in the venture split profits according to the portion of money invested. A JV financier often uses any return on that investment to go into other ventures with the same or other partners.
The Financial Benefits and Flexibility of Joint Ventures
One of the major benefits of joint venture financing is not owing the amount of interest which would be due on repayment of a loan. This is one of the biggest motivators for many investors and why you are seeing a growing number of venture capitalists around the globe. While it is true that it takes careful scrutiny and good business sense to oversee each new project, the ROI can be incredibly lucrative if handled properly. Whether venturing into other properties once this project comes to completion or seeking other parties to partner with, venture financiers often have several concurrent projects on the table.
Why Commercial Office Space Offers a High ROI
Offices are a great investment because current office space is limited. More and more entrepreneurs are seeking space from which to work and if you choose the right location and offer amenities as part of the lease, it is easy to amass a sizeable profit from just one building when filled to capacity. In fact, sole proprietors are not the only businesses interested in office space.
Large corporations that have outgrown their physical space limitations often rent off-site offices for support personnel. This is especially prevalent in areas where there is no room for expansion. Some companies add wings and annexes whilst others find it more cost effective to relocate offices to other locations. With so many companies doing the majority of their business online, office space truly is in great demand.
Joint Ventures Share More than Financial Resources
What hasn’t been mentioned yet is the whole area of ‘risk’ when investing in commercial property. Consider for a moment taking a commercial loan from your current financial institution. If all goes as projected, you will be making payments on that loan within the allotted time. However, what happens if the project goes bust for any reason?
Just as you share resources with a venture partner, so too do you share risk. Here again, bear in mind that everything is shared proportionately to the relative value of resources invested. For example, you are the senior partner in a venture with 75% of the capital outlay whereas your JV financier partner put in 25% of what was needed to get the project underway. If it should go bust, and of course everyone hopes this doesn’t happen, but if it should, your losses account for 75% of the total which would be what you would be held accountable for by creditors, the taxman and anyone else to whom you owe money.
Initial Agreements Prior to Signing a JV Contract
As any investor knows going into it, growing an investment takes so much more than money. Yes, a positive cashflow is the foundation of any investment strategy but there is much more to success than money in the bank! Alongside venture capital, the success of any venture also needs a heavy focus on:
- Risk assessment and management
- Meeting targets
- Driving strategies forward
- Leadership and organisational structure
- Project management
- Sound business model
- Governance (i.e. Board of Directors)
There is much to be agreed above and beyond the breakdown of investment capital and when there are several venture financiers involved, it could get a bit tricky without an oversight committee such as a Board of Directors or a venture capital firm overseeing the project.
Knowing When to Enlist Outside Assistance
One of the greatest benefits of being a venture financier is in being able to draw upon the assets of other financiers. If one party is expert in crunching numbers whilst the others are property developers with a keen eye on the market, team leaders from either side can step up to organise specific tasks. However, there may be times when outside assistance is called for and it is a wise venture financier who knows when to outsource specific jobs.
Most often you will see this need when the joint venture is taking place on foreign soil. Today’s entrepreneurs often start businesses in other countries and property developers are no different. If property can be purchased in an emerging market with the potential for a huge ROI, that doesn’t mean that the profits will be realised without a market specialist in that foreign land. What works at home in the UK may not work in Dubai, for example, and so outsourcing project management to a native project manager may mean the difference between success and failure.
Never Forget that Becoming a Venture Financier Is a Learning Experience
When building on foreign soil, you won’t be bringing labourers over from the UK, so a resident of that land would make for the perfect liaison needed to act as the general manager of construction. Property development venture financiers can amass quite a fortune, but it is always recommended to stay close to home for your first few deals. Once you have levelled the playing field and understand the tension between risks and advantages, you may wish to develop property abroad. Until then, learn the ropes at home before investing in an unknown market. The key to success is learning the ropes and being ready to fail from time to time. It’s a learning experience you’ll never forget.