One of the three primary asset classifications of commercial property is industrial property.
Although most of us are aware with residential real estate and what it entails to invest in it, not everyone is as knowledgeable about commercial real estate.
Commercial real estate is constructed and utilised only for commercial purposes. Retail, office, and industrial properties are the three primary forms of commercial property.
What is the definition of industrial real estate?
The term “industrial property” refers to real estate that is used for business purposes. It may appear straightforward, but it comes in different forms and sizes, and it encompasses a wide spectrum of company kinds.
Industrial real estate are classified into three categories: small, big, and huge.
Single or double-story buildings classified for industrial use make up small industrial sites. Interior space is frequently versatile, with a mix of warehouse and office space. Small enterprises, such as mechanics, research laboratories, and start-ups, employ ‘flex’ facilities.
Medium to big warehouses and factories are examples of huge industrial assets that are used to manufacture or store commodities. Distribution firms, such as third-party logistics, are among them (3PLs).
The ‘big box’ industrial spaces are on the bigger end of the range. These massive industrial areas serve as logistics and distribution centres, storing produced items before distributing them to retailers or directly to customers. You can imagine the sort of warehouse Amazon might have if you think about it.
What are the advantages of purchasing industrial retail property?
For the astute investor, investing in industrial real estate may be lucrative. The following are some of the most important advantages:
Rents that are higher equal greater yields.
The greater rental revenues and yields (annual return on investment) offered by industrial property are one of the most appealing advantages of investing in it.
Industrial property is normally priced in reference to the available square metres and may provide returns of up to 8%, compared to merely 4% to 5% on a dwelling.
Another benefit is that most industrial leases include yearly price increases that are generally related to the Consumer Price Index (CPI).
Leases with a longer term
Industrial renters are more likely than residential tenants to sign extended lease agreements (up to ten years in some situations), which give investors with far more security than a normal residential lease.
Net leases imply that renters are responsible for the majority of expenses.
The majority of industrial leases are on a net basis. This means that the renter is responsible for expenditures that would ordinarily be covered by the landlord. Insurance, utilities, and maintenance and repair charges are among them.
Low-maintenance structures
In general, a good tenant will keep the building in good repair because its look reflects on their business. As a result, industrial buildings can be low-maintenance since tenants are likely to take care of any maintenance concerns as soon as they arise.
What are the potential dangers?
It’s critical to comprehend the dangers of investing in commercial property. Here are a few of the most important hazards to consider (and this is by no means an exhaustive list).
Vacancy dangers
Because industrial assets are more susceptible to market fluctuations than residential properties, the danger of vacancy is greater. It might take a long time to locate a new client if a business fails and the economy is bad. Long periods of emptiness should be expected by investors.
Investing is costly.
Industrial real estate is considered a riskier investment by banks than residential real estate, hence borrowing costs are greater. Banks often need a larger deposit (about 30%), and interest rates are frequently higher than for a residential property loan.
Obsolescence
The industrial sector is always changing and evolving. This implies that if the clearance height is too low, access is limited, or the floor area is inappropriate for current machinery, industrial buildings can soon become outdated.
Even the site may become unappealing if adjacent road tolls are implemented or better-located logistics spaces become available.
The trick is to be flexible and to be at a good place. Businesses will be more interested in a facility that is adaptable and well-located.
Who is the one who invests?
Because of the high sums of money required to engage in the industrial sector, the majority of investors are multinational corporations with deep wallets. That isn’t to say that smaller investors aren’t welcome.
Owner-occupiers frequently perceive the benefits of owning their industrial facility. Learn more about whether you should buy or rent your office space. A-REITs (accredited real estate investment trusts) are another method to get into the market with a little amount of money.
