How to niche your commercial property investing to gain a competitive advantage
This article was first published in Property Investor News, October 2024
When Seth Godin said ‘Find a niche, not a nation’, he could have been talking about commercial property investing! Niching your commercial property investing is one of the best ways to make higher than average profit from your commercial investing. And ‘scattergun’ investing can be dangerous as individual commercial property markets operate very differently from others – be they by sector, location or tenant type.
But why is niching so important? Well, I would argue that niching is important with all investments – to ensure that you invest both your time and your money in a highly strategic way. It is particularly important in the commercial property market, however, due to the sheer number of different types of commercial property available to invest in. If you think of commercial property as any type of real estate occupied by businesses, and then you consider how many different types of businesses operate in the UK today, you can see how commercial investing can be overwhelming if you don’t find a profitable niche that works for you.
Most corporate real estate businesses, such as REITS, property companies and pension funds, specialise in a small number of commercial sectors, meaning that they gain strength and knowledge in those sectors. They approach their investing highly strategically – weighing up the returns, competition and supply and demand in those sectors, as well as the size of the opportunity which should play to their strengths as a business. When I was a Director at Land Sec in the mid 2000’s the business specialised in shopping centre and City of London offices – which provided an element of diversification but also meant that they niched narrowly enough so they could become market leaders at both.
There is no reason why SME investing should be any different – there is a reason why the very first session I have with my Board mentoring clients is ‘how to find your niche’. I have listed some key factors to take into consideration when considering which commercial niche to invest in:
1. Factors specific to you
I believe you should ‘start with the end in mind’ when you invest – there is no point investing a lot of time and money only to discover you haven’t achieved what you actually set out to do. The following are important:
- Returns – The first of these factors is to consider what return you want to achieve, and whether you want to be ‘hands off’ or ‘hands on’ to achieve these returns. The beauty of commercial property is that you can ‘park’ your money in high cashflowing property with long leases where you don’t need to do active management to achieve those returns. However, if you are willing to roll your sleeves up and do active asset management you can often achieve market beating returns.
- Interests – When clients are stuck finding their niche, I very often ask what they are interested in, or have expertise in – you’d be amazed at how you can align your interests with your investing. For example, one of my clients is a martial arts fanatic and is now looking to acquire commercial property for martial art studios – as he has contacts, knowledge and an interest in that type of property. This knowledge can often also provide you with a USP in your chosen market.
- Proximity – As you can often achieve longer full repairing and insuring (FR&I) leases in the commercial sector, you don’t have to invest close to home. However, often investing locations close to home mean that you have greater knowledge and provide easier access for asset management and relationship building with tenants and local agents.
2. Supply and Demand
If I was to specify the ‘secret sauce’ of commercial investing I would say that understanding supply and demand in your chosen markets, is it. This can be simply boiled down to two factors:
- Location
- Tenant Demand
As the old saying goes, there are only 3 things that are important with commercial investing, and they are ‘location location location’! The location criteria for each type of property differs – for example, with industrial you want access to road networks and perhaps similar operators; with retail you want to be located in high footfall locations to facilitate sales. Whatever the criteria, the important common denominator is tenant demand. If you have tenants queuing up to take your space, you are futureproofing both future income and capital growth. You can also probably achieve longer leases, higher starting rents and lower rental incentives in areas of high tenant demand. If there is too much of a particular type of property (such as high street shops in many towns and cities post pandemic) then tenants will be able to ‘name their price’, resulting in a downward spiral of capital and rental values. You can check out the supply and demand in your investing areas through local agents, and also spot tell-tale signs which indicate tenant demand, such as fully let space.
3. Trends
However, there is no point just assessing today’s supply and demand – you need to look to the future and work out if your property is in a sector that is declining or booming due to socio-economic factors as, unfortunately, eventually these will catch up with you. If demand looks strong into the future, then this will future-proof both capital and rental growth.
And of course, it’s always important not to rest on your laurels with your investing – constantly reviewing your portfolio, to catch any decline early on, is crucially important.
4. Available Finance
Acquiring properties that are highly financeable just makes life easier! At present, commercial lenders like multi-let space – particularly industrial properties. They are offering lower rates and higher LTV’s on this type of accommodation. And they have a point – if only, say, half your tenants cover your mortgage your rental upside is likely to be relatively healthy.
5. Commercial strategies and Asset Management
And of course, last but not least, you need to find a way to add value to your properties in order to facilitate market-beating total returns. This is particularly important in down markets like the one we find ourselves in, where you can’t necessarily rely on market movement for higher returns, but instead need to ‘force’ that value through asset management. This could work, for example, by targeting acquisitions where there are short leases and where there is the potential to extend those leases and add value.
By niching your commercial investing, you can often achieve higher than average returns in areas with lower competition. By spending some time up front in identifying your niche/s you have the potential to find ‘needle in a haystack’ opportunities where you have the potential to add large amounts of value to commercial investments.
If you’d like to find out more about niching or anything else to do with commercial property, you can find out more at https://suzicarter.com
