Things you should know about commercial titled residences

Are you planning to buy a commercial property in Malaysia but cannot decide if commercial property is a good investment plan? Real estate agents get asked whether a commercial or a residential property is a good investment plan. A commercial property typically refers to retail buildings, office buildings, warehouses, industrial buildings, apartment buildings and mixed building where it can be a mixture of retail, office or apartment. SoVo units are also considered as commercial property. Many people have been asking what is SoVo. SoVo, also known as small office, virtual office is unit that can only be used for commercial purposes. This guide will list down the advantages and disadvantages of investing in a commercial property in Malaysia.

A) Positive reasons to invest in commercial property

i) High returns on investments

The best reason to invest in commercial property over residential property is the higher income potential. Commercial property will normally have an annual return on investments between 6% and 12%. In addition, the price of commercial properties can increase by double in a short time (3 to 6 years) as compared to residential properties where it would normally take between 7 years to 10 years. This however, is large depending on the area of the property.

ii) Longer lease

Commercial tenancy will have a longer lease between 2 years and 10 years, whereas residential tenancy will turn over every 6 months to 12 months maximum, which is considered short as compared to a commercial tenancy. This is due to business commitment that the tenants have committed to as they spent a huge sum in renovating the shops for business purposes, hence, a longer lease.

iii) Well-maintained property

Renovation is needed to suit the business needs of the tenants, therefore, tenants will be spending a huge sum in renovating the shops to maintain the store image. After all, it is important to look presentable to attract the customers’ interests. Hence, the property owner and the commercial tenants will have their interests aligned: the owner will be able to maintain the property’s quality and the tenants will be able to attract more customers.

iv) Tenants

It is common to have tenants that are from large companies or corporations whereas the tenants for residential properties are typically individuals. With such big companies or large corporations, you can worry less on late rental payment as they are more reliable and tend to avoid the breaching of tenancy agreement.

v) Furnishing

Tenants for residential properties will normally request or prefer a fully furnished unit whereas tenants for commercial properties prefer an unfurnished unit because they tend to refurbish and decorate the unit accordingly. This will then save the owner a lot of furnishing and renovation costs.

B) Negative reasons to invest in commercial property

i) Bigger capital

You will need to fork out a big initial capital as compared to residential property for 2 reasons: commercial properties are more expensive and lower loan financing from the bank. With bigger initial investment spent on a residential property, you can only the gain in revenue will outweigh the gain in cost.

ii) Higher outflow

The percentage of tenant quitting the rent will be higher than the tenant quitting the lease in a residential property. This is largely depending on the demand in rental yields. If the location of the commercial property is not located in a hotspot area, the risk will be even higher.

iii) Higher interest rate with stricter lending condition

Obtaining a commercial property loan is typically much harder than obtaining a loan for residential property. Even if you manage to secure a commercial property loan from the bank, the percentage of loan secured is much lower as compared to the loan obtained for residential properties where it can go as much as 90% loan financing. In addition, the interest rate of bank loan for commercial property is typically higher as compared to residential home loan.

iv) Commitment

Owning a commercial property will demand a longer time spent on management as you will be dealing with more tenants as compared to a residential property where you deal with lesser tenants. You will be dealing with multiple leases, maintenance issues, public safety and so on.

v) Risky

Commercial properties generally have more public visitors as it is intended for commercial use. Therefore, you risk getting damages on your property easier as there are many people in a commercial property as compared to a residential property. There are some risks that can happen unexpectedly such as car accidents, or spray paint on the buildings. These changes in infrastructure are unexpected and unavoidable. Besides, the rental yields depend solely on the supply demands. That being said, more populations will increase the number of tenants in a commercial property for business purpose. However, this is very unpredictable as there is a possibility of lesser rental yields that result in longer vacancy phase. Although commercial properties will have a longer lease of 2 years to 10 years, once the lease ends, it will take a longer time to find a tenant. That being said, you will then need to cover all cost on your own.

In conclusion, commercial property in Malaysia can be a good investment option as well as commercial properties can offer a more rewarding income but with more risks. Whether or not to invest in commercial properties in Malaysia is depending on your property investment portfolio and how much risk you are willing to take. Make sure you weigh the pros and cons to make the best real estate investment decision that is suitable for you.