You may wish to invest in real estate, but you are no doubt wondering what type of property you should choose for a profitable investment. BuyerSide, your real-estate purchasing consultant in Belgium, gives you its best advice for an advantageous investment in rental property.
Office rental
Office rental may involve a room, a set of rooms or a building made available to a self-employed worker or a company whose activities do not involve trade, craftwork or industry. It may be a commercial activity but it must not be accessible to the general public and it may not be retail.
Offices leases are tenancy agreements subject to common law. The parties have a great deal of freedom and flexibility when drafting the agreement, unlike with residential leases.
What are the risks of renting out?
The biggest risk, of course, is being unable to rent out the real-estate property. There are in fact many reasons why property available for rent remains vacant, on both the residential and the business markets: the price is too high compared with the current rental market, the location of the property, the condition of the property, etc.
When it comes to business real estate, the future remains fairly uncertain at the moment, further to the health crisis. Working from home has become the new norm for many companies, which means that they no longer need as many offices as they once did. So by investing in offices, you are taking a vacancy risk.
How can you determine whether investing in office real estate is advantageous?
Analysing the figures / the mathematics of offices
First of all, the minimum value of the property must be calculated.
This overall value can be broken down into two value blocks:
1. Value block No 1: rental income with analysis of current leases
A property may be without a tenant or, on the contrary, rented out very advantageously. So above all, it is important to bear in mind the current rental situation of the building which you would like to buy.
An office tenant cannot simply leave, just as he pleases. He has an obligation to comply with his lease. A rented office property therefore provides definite cash flow security. This definite rental income until the date of the next break (possible departure of the tenant after giving notice) has to be taken into account.
The future rental income thus has to be actualised to calculate the current value of these cash flows. So a first value block is assigned here, based solely on current leases.
Therefore, the clauses in current contracts have to be analysed in depth:
• What compensation would be due if the tenants leave?
• Are the tenants granted any rental concessions (rent-free periods)?
2. Value block No 2: The value per m2 if the building were empty
Determining the second value block involves analysing the situation as if the building were empty.
How much is an empty m² worth in this location?
When determining the value per (empty) m², a priori the starting point has to be the existence of two scenarios:
A. Either the value as an office (to let)
B. Or the value if the building were converted for residential (or other) use.
A. Office value
To determine the value as an office to let, you have to estimate the realistic potential rent payable by a tenant.
Example:
Potential rent for an average location: € 125/m²
Anticipated minimum return: 5.5%
€ 125/m²/5.5% = € 2,272/m²
Other elements have to be deducted from this value, such as:
• Any refurbishing work (e.g.: € 150/m²) for the new tenant
• Rental concessions over the length of the lease (e.g.: six months of a fixed six-year lease = € 125/m²/12 x 6 = € 62.5/m²
• The time necessary to find this new tenant (e.g.: nine months = € 125/m²/12 x 9 months = € 93.75/m²
Our example results in a value per empty m² of € 2,272/m² - € 150/m² - € 62.5/m² - € 93.75/m², or a probable value of € 1,965/m²
TAKE NOTE OF THE CONVERSION POTENTIAL:
B. Conversion value
If the building offers significant conversion potential, you have to estimate what it would be worth if it were converted. This may be considered to be a worst case scenario. The basic assumption here is that occupants (tenants) can no longer be found for the property as an office, but it could be given a second life as a residential building, for example.
Example:
Value of residential property in the district: € 4,000/m²
Cost of transforming the office into a residential property: € 1,500/m²
VAT at 6%: € 90/m²
Cost in terms of architect’s fees, etc. (estimated here at 12%): € 180/m²
VAT at 21%: € 38/m²
Property development margin (estimated here at 15%): € 286/m²
Residual value = € 4,000/m² - 1500 - 90 - 180 - 38 - 236/m² = € 1,906/m²
The minimum value of the property (worst case scenario) therefore appears to be +/- € 1,900/m². This will provide a good indicator of the value per empty m².
CONCLUSION:
• If the value of the actualised rental income (value block 1) added to the value per empty m² (value block 2) is > the purchase price, this could be an attractive deal.
• If the value of the actualised rental income (value block 1) added to the value per empty m² (value block 2) is < the purchase price, the deal is probably not very attractive.
Non-numerical/emotional analysis
You are no doubt familiar with the expression “never try to catch a falling knife”. This applies to offices, too. Has the market bottomed out? We don’t have a crystal ball, but in our opinion, we may have reached the lowest point a few months after the lockdown. Things are gradually falling into place: people are returning to the office and the roads are becoming busy again.
For the future, it is important to distinguish between:
A. Very large companies
B. SMEs
Working from home or teleworking is better integrated into type A than type B companies. The major changes are coming from companies such as Proximus, GSK, etc. Working from home is far simpler in a large structure than in an SME.
• SMEs with around 10 workers need contact among colleagues to survive.
• Operating remotely causes few issues for large structures.
Offices are necessary (even essential) to coach the teams and create a corporate culture.
Working from home is more viable in the long term for big companies because:
• They already have a corporate culture
• They have high-performance IT tools enabling a certain amount of control
• They have certain degree of inertia; a working routine is already established here (like an ocean liner that cannot easily be halted), etc.
CONCLUSION:
In the future, demand for offices will very probably be higher for small surfaces (SMEs) from 150 to 750 m², than for large surfaces.
Large areas (over 1,000 m²) or buildings that are difficult to divide up will prove more difficult to rent out.
NB: Avoid jointly-owned buildings! Conversion plans will be more complicated to implement (permit, agreement of the joint owners’ association, etc.)
BuyerSide guides you as you purchase your real-estate investment
When you invest in real estate, your aim is to acquire a profitable property, naturally. However, numerous criteria have to be taken into account to benefit from an advantageous rental return. By calling on BuyerSide, your purchasing consultant in Belgium, you will benefit from total support with the acquisition of your future real-estate property. We aim to defend your interests at each stage of the purchasing process to ensure you a profitable acquisition, hassle-free.