“Should I invest in commercial property? Is it profitable? Do I have the necessary requirements?”
This article will aim to help you answer these questions by outlining the advantages and disadvantages of investing in commercial real estate, and by providing you with an overview of the best commercial investment offers in Italy.
First and foremost, any type of property can be a good investment opportunity. As far as profits are concerned, commercial properties typically offer more financial reward than residential properties such as apartments or single-family homes; however, there are more associated risks to commercial properties.
But what is a commercial property?
A commercial property may refer to:
• retail buildings
• offices
• warehouses
• industrial buildings
• apartment buildings
• “mixed use” buildings – in this case the commercial property may have a combination of retail facilities, offices and apartments.
Below are the main pros and cons of investing in commercial real estate.
Among the advantages are:
• potentially stable and fairly high ROI: generally speaking, commercial properties offer a greater annual rate of ROI which ranges from 6-12%; if the location and conditions are good the return can even go up to 12-14%. What’s more, income from a commercial property is usually constant;
• developing professional relationships: commercial property owners are usually businesses, not individuals. As such, the landlord and tenant are likely to develop a business-to-business customer relationship, which helps to foster professional interactions;
• being in the public eye: commercial property tenants and owners share the same interests; this helps the owner maintain and improve the quality of the property, and ultimately the value of both the owner and the tenant’s investment;
• obtaining objective price evaluations: it is often easier to evaluate commercial property prices because you can request the current owner’s income statement and determine what the property price should be based on;
• tax advantages: you, as the property owner, might be able to enjoy several tax deductions designed specifically for the business;
• portfolio diversification: purchasing a high quality and well-located commercial property may be a good way to diversify your portfolio;
On the other hand, commercial properties also have their disadvantages, for instance:
• time commitment: if you own a commercial retail building with many tenants it will be more difficult and time consuming to supervise all of them;
• professional help required: the likelihood is that you will not be prepared to handle maintenance issues yourself and you will need to hire professionals to help you with emergencies and repairs;
• bigger initial investment: once you have purchased a commercial property, the initial expenses will probably be very high;
• dependency on market conditions: businesses flourish and demand for commercial properties generally rises when the economy is strong. However, when there is an economic downturn, demand for commercial buildings usually plummets;
• maintenance works: commercial real estate requires regular investments in repairs and modernization. Without these there might be a greater risk of property damage and the cost of your insurance might increase.
Having analyzed the potential positive and negative aspects of owning commercial properties, let us outline some investment opportunities in Italy:
• Office spaces – Milan is one of the cities that has already reversed the negative trend – here, property prices increased by 1.4% on average in the first half of 2018. In prime locations, the price per square meter ranges between 500 and 600 euros, however, you might also find locations where each square meter costs between 375 and 500 euros.
• Retail – Milan experienced an increase of 1% in the average purchase price. The city is followed by Rome and Florence. In particular, the Italian capital achieved returns of 7.1% in prime locations and 7.5% in locations near the city center, while Florence achieved 6.6% in locations near the city center and 7% for locations in the city center.
• Logistics – in this sector, the average value was a stable 7% in the first half of 2018. It is said that the logistics segment will become increasingly important in coming years because of e-commerce: with a growth rate of 10%, Italy is one of the European countries with the highest growth rate in this market.
Before investing in Italy, you should take a few key features into account: firstly and ideally, you should invest in a commercial property that has a low-interest rate. Secondly, you should check your potential tenant’s references and previous business experience. Thirdly, when selecting the location of your commercial property, you should assess its accessibility to public transport and check whether there are surrounding business enterprises that could offer support to your tenant’s business. You should also check whether there are similar properties in the area in order to avoid an oversupply in the commercial real estate market. Moreover, you should consider whether the layout of the property can be easily changed so as to attract different types of tenants. In this sense, think about what experience you have in investing in commercial properties and remember to carefully analyze all of the terms and conditions that are mentioned in the contract. Last but not least, an overall analysis of the legal paperwork related to the property is essential as it helps to get a better understanding of what you will need to do – this refers to paperwork related to mortgage and ownership transfer in case you want to resell the property.
If, at any stage, you need advice with investing in commercial property, you can speak to experts like us. Indeed, we have experience with the intricacies of the Italian real estate market and are happy to provide you with a free consultation. Feel free to send us an e-mail at: info@italiarealestatelawyers.com.
