Best commercial investment for rental income

Best Commercial Investment for Rental Income

If you are planning to find the best commercial investment for rental income, you have a few options: buying a shop in a mall, serviced apartments, buying an office in a corporate building or buying a plaza such as the 4 or 8 Marla available in DHA Lahore. If you are planning to build rental income, then commercials are the way to go. Although residential ‘buy to rent’ are not part of this article, I will still re-state that renting out your new houses is the worst thing you can do. Luxury apartments offer the best rental return when you are looking at residential properties.

Today we are going to cover the basics of these investments, keeping our scope on just commercial investments and find out which one suites you. Remember that we should not look at these options in isolation, rather research must be done as per our guide on 7 factors to look for in a commercial investment. Never ever compromise on the guide; the type of commercial investment is a secondary consideration. A corporate office which passes our guide will give much greater returns over time than a plaza which does not and vice versa.

Quickly moving forward let us study the pros and cons of each type of these commercial investments one by one.

Shops

This is undoubtedly one of the best options out there as long as they follow our 7 basic factors of commercial investments. The bigger the better is applicable here as bigger malls offer most traction and bigger brands as well. Therefore I will only recommend investing in malls with the potential of attracting big brands or located centrally in the downtown area. These malls must offer a diverse retail area, ample car parking and entertainment such as cinemas, kids play areas and food court.

Dedicated Malls developed by societies, Strip malls as those on MM Alam road and Gulberg, Grand or regional Malls such as Goldcrest Mall DHA Lahore, Packages or Emporium are an example of such retail constructions. Please note that shops in packages nor emporium are up for sale.

Pros:

• Most malls are managed thus your active involvement is not required. This makes them the best source of passive income.
• Shops offer a lot of flexibility in terms of size & price thus almost everyone can invest, no matter what your budget is.
• The rental return is higher than, offices or plaza.
• You can always use it to run your own business as long as it follows the Mall polices.
• You can buy it on easy installments in newly launched Malls which are under construction.
• Shops in food court are a safe and easy way to step into food business.
• Offers good capital gains.
• Long term leases offer stability.

Cons:

• You can rent it out independently but have to follow the Mall management policies.
• If you do not rent out your shop, you will have to pay idle charges to Mall.

Offices

Purpose built corporate offices are one of the best rental commodities you can opt for. Usually these offices are more than 2000 sqft and the entire building is designed to complement the offices within. Presently there are only a handful of such buildings in Lahore which can really be credited as such. Tricon corporate center, Askari tower and Arfa Kareem tower ( Not for sale) are good examples of such buildings.

There are a lot of other high rise options in Gulberg with offices available, but not very premium. I will strongly advise to only invest in premium buildings purpose built to serve the corporate sector.

Pros:

• You can get them on easy installments while the building is being constructed.
• The building is managed so you can just sit back and relax enjoying the rents.
• Good capital gains over the years.
• You can use it for your own business.
• Long term lease gives you a worry free experience as a land lord.

Cons

• If you do not rent it out, you will still have to pay idle charges.
• Culture is still developing so sales/resales may be slower.

Serviced apartments

This is a decades old concept which has recently been adopted by developers in Pakistan. These are located in central areas and can be used for rental purpose or for personal alternate residence although some developer may not allow the latter. The flexibility of use as short mid or long term rental unit or for personal use make it one of the most safe and rewarding investment.

Location is of utmost important in this case and must be central and next to tourist hot spots such as Gulberg in Lahore. However, any other areas which offer a possibility of a luxury hotel can be suitable for such buildings as well. These buildings offer spacious accommodation, in comparison to hotels and at a cheaper price, while matching almost all the luxury.

Pros

• You can invest easily in instalments.
• Price is usually cheaper than shops and offices.
• Rental management is usually offered by the developer.
• Highly rewarding in terms of rents offering 7 to 8% returns per annum.
• Great solution for expats to spend holidays in Pakistan in there own apartment as most developers allow up to 30 days of use for personal residence.
• You can opt to rent it out yourself on short, mid or long term basis instead of getting it managed.
• Great opportunity to start your own Air BNB type business which can earn you 15 to 20% per annum.

Cons

• Although a very successful model abroad it is still in infancy stage in Pakistan.
• Returns on your asset may vary depending on the performance of the management.

Hotels

This is what the name suggest, hotels tend to be located in centralized and convenient areas, like near major attractions or airports. Amenities that a hotel has, that a serviced apartment may lack include room service, a mini bar, an on-site restaurant and/or bar, a spa and continental breakfast.

Investment in a hotel are very similar to a serviced apartments except for a few differences. Some developers may offer a hybrid solution between hotels and serviced apartments, which I believe is best of both worlds.

Pros

• Hotels may offer up to 10% rental income per annum.
• You can invest easily in instalments.
• Price is usually cheaper than shops and offices.
• Rental management is usually offered by the developer.
• Good solution for expats to spend holidays in Pakistan in there own hotel room.

Cons

• Completely dependent on the hotel management for returns and rentals.
• Your room will remain with the hotel management and you can not opt to live in it except for 30 days offered by the hotel every year.
• If the hotel performs poor you suffer as the building is purpose built and can not be used as apartments.

Plaza

These are usually 4 to 8 Marla and in some cases even bigger units of independent commercial units in developed areas. In DHA Lahore you have the permission to build one basement, ground, mezzanine and four floors in Phase 5 onwards, whereas only 2 floors are allowed in earlier phases. These commercial units have been the fundamental commercial investment in Lahore for decades until now when the retail sector of these units has been put under threat by the latest trend of Malls.

However there is and there always will be a need of independent commercial units in times to come. Banks, restaurants, coffee shops, grocery stores, hardware stores, book stores, electric stores, low to mid end retailers etc and small offices will be the fundamental users of these commercials in days to come.

Pros

• If invested in the right property, it can give you phenomenal capital gains.
• You can lease the building to different tenants.
• You can use the building for your own business, while the remaining parts of the building are rented out.
• You have complete control of the building and who you rent it to, which does give a better experience of being a land lord.
• You can sell it floor wise now in DHA Lahore which gives you good liquidity.

Cons

• Being in control is a double edged sword as you are responsible for its maintenance and management.
• Tenancy issues and defaults are more frequent.
• These are usually very expensive units and you will need 100% money upfront to buy.
• The rents are usually not more than 4 to 5 %.

Best commercial investment for you

The best commercial investment for you depends on a lot of other things than just the type. Any commercial investment may it be a plaza or an office, shop or apartment, if fails to comply with the basic rules of commercial investing will eventually fail. Independent buildings which are considered most safe by the majority have failed miserably in many locations. Just like any other investment you still need to make the right call and invest in the right property.

In my opinion one size does not fit all and it depends on your circumstances which investment best suits you. Personally, I will prefer passive rental income to save myself of all the trouble of actively managing it. In addition fortunately in our case the passive investments are giving higher rental return, so it is a win win.

Captain (Retd) Shahnawaz Yaqub Bhatti

Investment Consultant and CEO at Imlaak

Mob : +92 333 1616160 ( WhatsApp)