Property is a complex asset. Although a cliché, it is true
that no two properties are alike. This is particularly true for commercial
properties. Commercial properties mainly consist of retail shopping centres,
industrial warehouses and office blocks.
For an investor the allure of commercial property is its ability to generate income, where a tenant will sign a lease agreement, preferably for a long period of time (8 – 10 years). Furthermore, the potential for the income to grow through lease escalations over time leads to an uptick in value which is also an attractive feature of property investment.
Of course, as with any investment, property is not without risk. There are many financial, legal and structural risks inherent in property investment that are not obvious to individuals who are not experts in the field.
The main risk is primarily financial risk. A thorough financial due diligence would need to analyse the income generated by the lease agreements and the building expenses to ensure that the projected net income as provided by the seller is 100% correct.
There is a significant legal risk in property, mainly from potentially onerous terms in the lease agreements and also conditions on the title deed that need to be fulfilled. A thorough investigation of the lease agreement, title deed and other related documents is crucial to ensure proper due diligence.
Investing in real property means investing in the structure of a building. Correcting structural issues in buildings can be a costly affair. A thorough investigation of the structure will ensure that a complete understanding of the cost implications of any work to be done will be gained as this will have a direct impact on the bottom line.
However, over and above these specific risk categories, it is crucial for the due diligence to provide a comprehensive overview of the property as an investment. This would include, in addition to the above, the likelihood of attracting tenants or enduring vacancies, competitive threats, liquidity and other risks.
Tenurey Bespoke Advisory provides a turnkey property due diligence solution to our clients. We pride ourselves in our attention to detail and our ability to identify key unique risks on property transactions.
For all your due diligence requirements email us on info@tenurey.com.