What are Commercial Properties REITs?
Commercial properties REITs are real estate investment trusts that specialize in commercial properties. The REITs operate like mutual funds, where investors contribute funds to a central pool to purchase commercial properties. It gives them the required exposure to commercial real estate investments without having to buy properties on their own.
- Commercial properties REITs refer to real estate properties that are primarily used for business purposes, such as offices, hotels, retail stores, etc.
- Commercial REITs trade shares on the public exchange market, and investors can become shareholders by buying shares of these companies.
- Compared to residential REITs, commercial REITs are preferred by investors who are looking for higher returns on their investments.
How to Invest in Commercial Property REITs?
Real estate may be categorized into residential, industrial, and commercial properties. Commercial properties provide workspace for business activities, and they include office buildings, hotels, manufacturing buildings, convenience stores, etc. Compared to residential properties, commercial real estate is considered a sound investment since they provide higher returns.
However, it also means that the investor will have to incur huge costs to set up real estate properties and customize each unit according to each tenant’s preferences. An investor interested in investing in commercial properties can choose to make investments either directly through the ownership of a real estate property or indirectly through owning shares in REITs that invest in real estate.
1. Direct investment
Direct investment requires a considerable high amount of capital to finance new construction and acquire existing commercial buildings. Commercial properties are a high-risk, high-return investment. It means that people who invest directly into such properties must possess significant knowledge about the industry and a large amount of capital.
Direct investments are suitable for high net worth individuals and institutional investors. To learn more about financing direct investment in commercial real estate, consider CFI’s Commercial Real Estate Finance Specialization program.
2. Indirect investment
Indirect investment is the most popular method of investing in real estate without spending too much capital or being directly involved with the property. Investors get to own commercial real estate by purchasing shares in a real estate investment trust that specializes in commercial properties.
REITs develop and own commercial real estate, and investors can purchase their shares in the same way they purchase stocks and bonds. It also means that investors will own properties without taking any mortgages, as is the case with direct investment.
Investors get a share of the net revenues, which are distributed to shareholders as dividends. REITs are managed by an experienced team of professionals, which saves investors the hardships involved in dealing with difficult tenants. To learn more about publicly traded securities and other capital markets concepts, consider some of CFI’s courses on these subjects.
Top Commercial Real Estate Categories
Commercial property is defined as any property that is exclusively operated to provide a workspace to businesses, which, in return, pays monthly rental income for using the premises. The following are the main categories of commercial real estate:
1. Retail stores
Retail stores sell smaller quantities of products to the end consumer. They typically get their products from manufacturers or distributors at a discount and then resell them at a profit. Retail stores comprise shopping malls, big-box retailers, discount stores, grocery stores, supermarkets, beauty salons, etc.
Hotels are commercial establishments that provide lodging, meals, and other services to their guests on a short-term basis. The rooms are usually numbered to make it easy for guests to identify their rooms.
Hotels may include motels, business hotels, as well as business resorts that accommodate travelers or people on holiday. The hotels category excludes homes that rent out their rooms to guests through the Airbnb service.
3. Office buildings
Office buildings are building spaces that are rented out to tenants for the purpose of conducting businesses related to consulting, clerical services, administration, and other businesses related to offering services to clients. An office building is designed in a way that it can host single or multiple businesses. Office buildings often house businesses that deal with legal services, architecture, IT solutions, business consulting, trading, and medical practices, among others.
4. Industrial buildings
Industrial buildings are primarily used for the production, distribution, or storage of a good. Some industrial buildings are not considered commercial, especially if they are built on land set aside for factories or those zoned as industrial land. For example, a building used for storing manufactured goods awaiting dispatch may be classified as a commercial property.
Commercial Properties vs. Residential Properties
From an investor’s perspective, commercial properties are often considered a sound investment compared to residential properties due to the higher returns associated with the former. Although they cost more to acquire, commercial properties are likely to bring in higher rental incomes, especially when the building houses high-value clients such as multinationals, banks, NGOs, and law firms that plan to lease the space over the long term.
Also, there are fewer hurdles when dealing with corporate clients. Many companies take up whole floor spaces or multiple floors in a business complex compared to individual clients who usually occupy a maximum of one unit in a residential building.
Residential property owners offer less flexibility in terms of leasing terms, since some tenants may not have plans of staying in the unit over the long term. Also, when pricing residential units, property owners need to make various considerations, such as amenities on site, location, accessibility, emotional appeal to potential tenants, etc.
If clients are not attracted to the residential units due to a lack of accessibility, lack of specific amenities, or other factors, the property owner needs to do extra work to fill up the units at any given time, which can result in downtime where there is no rental income.
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