Owing to its less-expensive and low-risk nature, most novice investors consider buying residential real estate to be the best property investment in Pakistan. While there is nothing wrong with this notion, the truth remains that investing in commercial property can be much more lucrative as it can generate higher capital gains. In addition to that, commercial investment in Pakistan is a great way to diversify your portfolio and build professional relationships.
Office buildings, retail outlets, shopping malls, industrial buildings, warehouses and mixed-use developments featuring apartments and shops are among the most common types of commercial properties in Pakistan. Compared to residential real estate, purchasing commercial property may require a heavier up-front investment, but it will also offer a higher and fairly stable rental income for years to come.
Buying commercial property for investment requires a lot of patience, as everything from risk assessment to documentation and from construction or renovations to finding the right tenants can take a very long time. However, the longer leases and substantially higher rental yield more than make up for it.
Just like any other type of investment, buying commercial real estate entails adequate preparation and due diligence. There are several factors one needs to consider if they want their investment to be successful. Let’s take a look at them.
What are the Factors for Successful Commercial Investment in Pakistan?
The most important factors for commercial real estate investment in Pakistan include:
- Selecting an ideal location
- Studying market trends
- Choosing the right tenants
- Understanding the risk
- Top-notch facilities & amenities
Let’s take a look at each of these factors in detail.
Selecting an Ideal Location
Location is the most crucial factor for commercial investment in Pakistan as it determines the value of your property.
Ideally, a commercial building should be located in an area that receives a substantial amount of vehicular and foot traffic. To generate a higher rental income, it is recommended to invest in properties situated in well-developed localities with good infrastructure. This can help attract high-end businesses such as international brands and big banks to be your tenants.
Furthermore, patrons must be able to see your building rather easily from the road instead of having to search for it. For long-term returns, you must also narrow down on commercial properties in fast-appreciating areas. Access to public transportation and proximity to major landmarks should also be taken into consideration while looking for commercial property for sale in Pakistan.
Apart from the location, the demographics of a locality can also impact the success of your commercial real estate investment. You should study the area demographics to determine whether your property would be a good fit for the neighbourhood. For example, investing in a retail building may not generate enough revenue in a relatively low-income neighbourhood. Similarly, an area with little to no access to public transportation might not be suitable for an office building.
On a side note, those who live in Lahore can check out our detailed guide on the commercial areas in DHA Lahore for more investment options.
Studying Market Trends
Studying the trends of commercial property in Pakistan is yet another factor that can lead to a successful venture.
A smart investor always has adequate knowledge about the legal implications, zoning restrictions, competition, vacancies, rental value and risks associated with buying a property in a certain area.
You must also determine the property demand in an area before making an investment. For instance, investing in a retail building in a prominent commercial area with major competitors will only make sense if there is a demand for another similar venture. This goes for office buildings, industrial buildings and warehouses as well.
Moreover, it is important to understand the dynamics of different property types. If you are planning to invest in a small shopping centre, you must take into account both short and long-term impacts of e-commerce platforms on the consumer market. Likewise, the growing trends of coworking spaces can also affect the demand for office space in an area as small startups may prefer a cheaper, no-strings-attached arrangement.
Choosing the Right Tenants
Finding the right tenants for your commercial property is an extremely important factor that ensures a good and steady rental income.
In case you are buying a building that is already occupied by several businesses, it is imperative to investigate the financial stability of each tenant to make sure they can meet the rent deadlines. You can also study their business model for a clearer picture. To put it simply, it is ideal to have successful businesses as your tenants as they are less likely to default on the rent and ensure a continuous flow of income. Since well-established businesses have a larger customer base, they are also less likely to pack up and move to a new location.
The outstanding liens and litigations of the tenants is another factor to look out for while making a commercial investment in Pakistan. Since commercial leases or rent agreements last for several years, you must be extra careful while vetting your options. As a real estate investor, you must avoid selecting a tenant with a history of financial or legal troubles, as it can have an adverse effect on the rental yield. In addition to that, it can also cast a negative image of your property.
Understanding the Risk
When it comes to the commercial vs residential investment debate, the latter is generally considered a low-risk option due to its consistent demand in the market, whereas the former is considered a high-risk option as it is more costly.
To be honest, the risk in commercial real estate investment varies with the type of property. Compared to residential real estate, where two adjacent houses or plots may show similar risk, the risks in commercial investment in Pakistan can be significantly different for properties located in the same area. Since no two commercial properties are alike, the risks associated with them can fluctuate without any correlation between them.
Therefore, it is important to understand the risks associated with your potential investment before buying commercial real estate in Pakistan. This includes assessing the property condition and selecting the right tenants.
Although it may sound complicated, the first step to assessing the property condition is to take a simple tour of the building you are planning to purchase. Take a look at the structure and interior amenities of the properties to determine which features need to be updated or removed. Once you’re satisfied there are no structural damages or major renovations required, you’ll move to the second step and review the property documents. These may include zoning documents, environmental assessments, property insurance and more.
Facilities and Amenities
Lastly (and perhaps most importantly), the facilities and amenities of commercial development have a huge impact on its marketability as well as rental yield. Even if you are planning to invest in commercial real estate with little money, you shouldn’t compromise on basic amenities such as water, gas and electricity supply. Cleanliness and maintenance are also important for commercial property.
Some of the most popular facilities and amenities available in commercial buildings include covered parking areas with designated spots for each tenant, well-maintained lobby and reception desk, high-speed elevators, safe and secure environment, CCTV surveillance, fire safety system, emergency exits and backup power generators. An impressive façade and well-designed interiors also add to the charm and uniqueness of a property, as such factors are bound to attract more high-end tenants. In comparison, properties with no designated parking spots or poor maintenance may not draw the attention of big businesses.
This brings an end to our guide detailing the factors behind successful commercial investment in Pakistan. Feel free to share your feedback and comments with us on firstname.lastname@example.org.
Meanwhile, you can take a look at our tips to increase the energy efficiency of a commercial building and also learn more about the advantages of living close to a commercial area.
If you want to learn more about buying property in Pakistan, stay connected to Zameen Blog as we strive to keep you updated about the latest real estate trends in the country. You can also subscribe to the Zameen Newsletter and Facebook page for the latest updates.