Residential Investors to Commercial Climbers
Athena Advisers
Invest beyond your borders. That’s our mantra. And our mission is to make it easy.
Why are more Residential investors levelling up to be Commercial Real Estate investors, despite the many differences?
To a commercial property investor, the residential world is just part of their portfolio. It’s a home they live in. Or another string to their diversified bow of property assets.
To the regular residential property investor or owner - a ‘Resi-Normal’ - the commercial property world is often another dimension where people speak a new language…
Leveraging a robust capitalisation rate in conjunction with favourable debt service coverage ratios, you need to strategically diversify your portfolio by acquiring mixed-use emerging market developments with blue chip covenants, thus optimising both long-term NOI growth and mitigating vacancy risk through triple-net leases.
It’s all fluff though. Translation:
Buy property with a good return on investment in a growing area. Make sure the rent covers the loan payments, reduce the chance of losing money with long-term leases where tenants cover most expenses, and keep your loan low enough to avoid trouble if interest rates go up.
No wonder most baulk at the idea of investing in commercial real estate!
At Athena Advisers , around 1 in 50 of our clients is a commercial property investor. These clients generally vary from individual investors buying €2m plots on which to build schools near Lisbon to consortiums to €100m on mixed use hotel and residential redevelopment in the French Alps.
Clearly, both of these commercial property investor types knew what they’re doing before they came to us.
They understood their objectives and have often invested already. What they needed was localised expertise, local market access, a plug-in approach to the destination, a handshake-approach to the handful of people that make these markets work. The little black book.
Today there is a new type of commercial property investor. Once a Resi-Normal. Now a Commercial-Climber striding confidently into the world of commercial real estate. Shrugging off the jargon.
When it comes to investing in real estate, one of the first decisions investors must make is whether to focus on residential or commercial properties. Each type has its distinct characteristics, advantages, and challenges.
Residential Real Estate
Residential real estate refers to properties intended for living purposes. This includes single-family homes, multi-family units, and apartments.
Investing in residential properties often appeals to those seeking a more emotional connection to their investments. Investors typically aim for stable rental income, which can range from 3% to 4% returns.
However, purchasing a home involves navigating the emotional landscape of buyers, as they may have specific desires regarding features and aesthetics.
Investors often interact with tenants who may reach out for maintenance issues, adding a layer of management responsibility. These properties usually appreciate over time, but capital appreciation can vary significantly.
Commercial Real Estate
Commercial real estate, on the other hand, encompasses properties used for business purposes, such as offices, retail spaces, warehouses, and more. These investments tend to be more straightforward and less emotional.
The focus is primarily on the numbers—cash flow, tenant stability, and long-term leases. Returns typically range from 5% to 10%, with long-term leases (10 to 20 years) reducing management headaches.
Commercial deals often involve more thorough due diligence, particularly regarding tenants’ financial stability. Investors can often purchase properties sight unseen based on comprehensive market analysis, making this type of investment attractive to many.
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Key Differences
There are far more residential investors than commercial investors because of the complexity and expertise required in commercial real estate. Due diligence is essential, and structuring a deal often requires deeper market knowledge. Most of our clients are foreign investors, and they may not know the right lawyers or accountants to work with. This is where we come in as advisers, guiding them through the process.
For example, we had clients who started with a first investment with us and have now grown their portfolios. Initially, they might put in €2-3 million, and now, they’re investing in €6-8 million assets because they’ve gained confidence in the market. It’s important to be established in the market and know the key players. At Athena Advisers , we offer transparency and share all the knowledge we have to make the process smoother for our clients.
Opportunities for Commercial-Climbers
Right now, we have a few development opportunities awaiting approval, including a student residence in Lisbon and a residential project across the river. One of our standout projects is in Carrapateira , an emerging destination on the southwest coast of Portugal.
This is a great example of how investors can join forces. Let’s say six friends each putting in €2 million - for a total investment of €12 million. With this, you can build 18 houses, sell each for €1 million, and recover your initial investment. The remaining six houses can provide a steady income for the next 30 to 40 years.
Carrapateira is especially promising because it’s inside a natural park, where no further construction is allowed. Houses in the area have a 90-95% occupancy rate year-round, which is exceptional. During the summer, properties are booked solid, and now, with the rise of digital nomads, we’re seeing long-term rentals during the winter months too. People come to work remotely, enjoy the beach, and live here for three or four months at a time.
In Costa da Caparica south of Lisbon, we’re transforming a central hotel within an area that has a severe lack of hotel accommodation. The lack of hotel accommodation is so acute that a record number of local property owners put their properties up for short term rentals last year via providers such as AirBnb.
The area has just six hotels, when other coastal towns of equivalent size and popularity have dozens. Here we offered investors the opportunity to co-invest in the project as shareholders. It will be the first of a range of hotels within a growing brand of destination hotels around Portugal.
Equally, with Portugal’s continued and growing popularity as a business hub and therefore a relocation destination too, there are also new opportunities for Commercial-Climbers in traditional sectors of commercial property.
The recent news that DHL has tripled its operational capacity at Porto is a sign of the continued growth of commerce in Portugal. This €25m facility will boost its operational capacity and enhance its sustainable operations.
Portugal has been one of the strongest performers in Europe in terms of economic growth in recent years, supported by healthy demand for Portuguese exports, and DHL Express is fully committed to enabling the country's further trade development over the long-term
Mike Parra, CEO of DHL Express Europe
Such investments will have a trickle down effect and lead to the requirement for facilities in other areas of Portugal, logistics centres, packaging and so on. Here the tenant would be a well known global company so the returns would be solid and reliable.
In conclusion, both residential and commercial real estate offer unique opportunities and challenges for investors.
Understanding these differences is crucial for making informed investment decisions.
What to do if you want to invest in commercial real estate?
If you're ready to step into your first commercial deal, based on the information we’ve shared, the first step is to contact or visit us at Athena Advisers .
We’ll guide you through the initial exploratory phase, helping you understand your options and advising on the next steps to take in the process.
Founder Athena Advisers, Harvest Series, Board member Private Finance Group
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