Investing in office property

reserves the option to insert a goodwill payment charge to prospective tenants.
Demand for office space is cyclical and is not as certain in our local market as that for residential purposes as it is subject to external variables, in some instances beyond the control of landlord or property owner.
In our contemporary market office investments are found in existing buildings in centralised areas, new constructions in targeted growth areas or conversion properties in satellite areas that are benefiting from congestion or pricing of centralised areas.
Office demand is mainly by people and companies in the service industry.
In our economy, the manufacturing industry is still on a slump as most people are focusing on service provision.
One cannot detach office space demand from other factors that relate to general economic growth.
Government’s projections on short- to long-term growth of economy will generally translate to future demand of office space especially in the areas growth is projected to be based on.
This strong interrelation with policy makes this mode of investment highly susceptible to economic shocks or surprises.
A good example will be the period the country dollarised.
A lot of office buildings experienced extreme vacancies causing loss of income to owners ultimately increasing the burden of maintenance expenses and prolonging the period before profit benefit to new investors.
The general supply of newly constructed office space is currently projected to remain low as a result of the market’s liquidity constraints while at the same time the economy is projected to grow this year by around 8 percent owing to growth in mining and other industries.
This in essence creates opportunities for owners of existing buildings in high traffic areas as growth in economy is normally complemented by the growth of the service industry.
It also creates major opportunities for those areas in the periphery of business districts as properties may benefit in value growth from conversions.
The purpose of investing in office buildings is to achieve a profitable rental.
The rental value must balance between one’s desire to achieve maximum benefit and the need to lower tenancy turnover at given periods.
It is crucial that the office space available is fully utilised at all periods to ensure that investment is profitable.
As the majority of the potential tenant pool is small to medium business, this creates a potential problem as such businesses are volatile and in some cases do not             make the best candidates for long-term leases.
Where the location of the building is highly favourable to small businesses, this provides opportunity to limit the risk of default as one can increase the number of tenants ensuring that at any given period one receives a minimum amount of rental income.
This approach, however, presents problems of its own as management of property becomes strenuous requiring extreme diligence.
This in normal cases advances deterioration of property as multiple tenants inevitably take different approaches to property maintenance or improvement, which will ultimately affect the entire state of property.
The effects may, however, be circumvented by the engagement of a diligent property manager with a proven track record in managing multi-tenant buildings.
Some of these potential problems may be addressed at the tenant selection stage by adopting a stringent selection approach.
However, where one intends to purchase an existing office block, it is important to find out its net income which is calculated as the difference between its rental income and total operating costs.
This figure will be what will be used to calculate the period of investment return. If the building is occupied, a study of its occupation rate and the general payment timelines of its tenants with long leases.
At this point location plays an important role as it determines the projections of future demand and calibre of tenants.
One must not ignore the general structure of building including its salient features.
It is important to always keep in mind that although national economics affect office demand, in some instances, demand is localised to certain areas and macro factors play a limited role.

l Vengai Madzima is a property investment consultant and analyst with Wisdom Properties. He can be contacted on 0772 468093 e-mail: [email protected].