Why it pays more to invest in office space

For many people, owning a house or land still remains the best investment choice with the best returns. But lately, office spaces are becoming a viable alternative investment vehicle that many potential investors in real estate still do not know about.

Gone are the days when anyone looking for office space only had the option of renting it.  Currently, more and more commercial tenants are becoming owners by way of investing in upcoming spaces.

Developers across the country have seen this new niche in real estate and are now looking to interest investors in the opportunity to own commercial properties.

To add the icing on the cake, realtors are offering well laid out payment models to ease the purchase process for clients.

“Buyers can take a bank loan to finance the purchase as long as we agree on terms,” says Martin Dias, the Chief Executive Officer Financial & Property Consultant Ltd. His company is one of the selling agents for Commodore Office Suites in the Kilimani area.

“Majority of the corporate buyers we come across are people who have worked for some time and have been planning for such investments. This means they often don’t need any form of financing but instead are able to make lump sum payments - though we also accept payment in instalments.”

Commodore office suites is just one of the many properties around the country that are selling office spaces. Others are Sifa Towers on the Ring Road junction in Kilimani, the Mirage on Chiromo road, Westlands, Blue Violet Plaza on Kindaruma Lane, FCB Mihrab offices in Kilimani and The Edge, an upcoming building in Parklands among others.

Commodore is multi- storey building with 90 units most of which are already occupied.

“We still have some units reserved for rental clients. The owner of the building has to have some money coming from rent to be able to offer services in the building such as cleaning and the generator,” says Dias who observes that commercial property owners like his client, prefer to sell off a fraction of the units to settle loans as well as earn returns on investment.

Value of space

The size of the units sold by developers and property agents depends on the client’s needs.  However, an office space that measures 1,000 square feet can comfortably accommodate 10 employees.

The size also dictates the value of the space in question. For instance, one square foot may range in price from Sh11, 000 to Sh20, 000 depending on the location of the office.

Prime location like Westlands can fetch upward of Sh19,000 per square foot.  For Mirage, which is almost complete and is directly opposite the Riverside Office Park, the developer is offering buyers a competitive rate of Sh11,000 per square foot. 

The Edge, whose artists’ impression I saw, will be a magnificent modern commercial property in Parklands when completed and is currently fairly priced because those who are buying it are doing so off-plan.

The building is not yet up. The developer has priced it at Sh2,000 per square foot.

The development has 19 floors with two pent offices. The available space is between 1000-10,000 square feet. But those looking to buy a sizeable office like a whole floor will have to part with Sh30million.

Expected returns

Generally commercial spaces tend to be highly priced per square foot because of the expected yields from the investment.

Dias gives an example of the kind of returns one would expect from buying office space and renting.

According to him, if someone bought space valued at Sh10million in Upper Hill after getting 100 per cent bank financing payable in 10 years at 15 per cent interest rate per annum, and disposed of the property after 10 years, they would earn a return of Sh15million on the investment. This means, the net cost of the office for the 10 years will only be Sh4.3milliion.

On the other hand, if the same person was to rent the space for the 10 years and was charged a monthly rent of Sh200,000, then they will pay Sh24million. But this is if the rent charged remained the same.

In most cases, landlords increase the rent by 30 per cent with every lease expiry period. For office spaces, the maximum lease period is five years and three months.

The most expensive among commercial spaces is shopping malls, followed by offices, residences then warehouses.

Buying office units, is a good investment that saves the owner long term expenses. For instance, instead of spending money leasing, the same can be invested in a commercial purchase. However, for office tenants, renting is cheaper in the short-term.

The other challenge in renting office space is limitation in playing around with décor and interior design; and hiked rent every time the lease expires.

Although purchased office spaces are good, they are not suitable for businesses that have a lot of foot traffic.

“The spaces on sale fit the profile of corporate clients with less foot traffic and not businesses such as schools. We have to be cautious of who is buying the space because clients don’t want to share space with noisy tenants,” he says.

The other disadvantage for buyers is scarce parking space. Usually, buyers get an average of one parking space.  Unless one buys the whole building, space is bound to be shared. Even so, some employees will still have to make do with public parking lots.

If you are an investor, looking for where to put your money, give a thought to buying space and renting it out. In the long run, you will make more money from your investment.