Investing in commercial real estate is a direction for those seeking stable income and capital growth prospects. However, in the current conditions of the Ukrainian market, it is important to consider a number of factors that may affect the success of an investment. In this article, Pavlo Kravets, Head of Sales at the FORMATSIA.LVIV industrial park by Alterra Group, shared the key aspects investors should pay attention to when choosing commercial real estate for investment, as well as potential risks and ways to minimize them.
Investment in commercial real estate is an attractive option for many investors due to stable income, fast payback, and high liquidity. Today, investments in warehouse and production real estate stand out among other types of real estate, as they provide not only long-term financial benefits but also contribute to business development and significantly stimulate the country’s economic growth. As with any other niche, investments in commercial real estate always involve certain risks. It is necessary not only to understand the possible threats but also to know how to effectively minimize and manage them.
What are the risks?
In commercial real estate investments, two key risks can be identified: the non-completion of the property and the failure to receive the projected profit.
The first risk is the non-completion of the property. When investing at the construction stage, it is first necessary to study in detail the project developer, its history, and its reputation in the market. It is important to understand which specific people are responsible for managing your funds. Attention should also be paid to the scale of the project and the phasing of the construction of the complex. It is better when the project is divided into smaller buildings that are commissioned separately — this reduces the risk of non-completion.
An essential part of the review is checking the availability of all permits and ensuring that construction complies with the design and cost estimate documentation. Developers often build something different from what was originally designed, which can later make it impossible or significantly delay the commissioning of the property.
Investment in Ukraine's commercial real estate
It is worth investing in projects of companies that are leading experts in the market, actively share their experience, and participate in industry conferences. Such openness on the part of the developer indicates that a strong reputation is highly important to them.
The next risk is financial, namely the failure to receive the expected income. This risk exists when investing in any real estate; the only difference is where it is higher and where it is lower. It is important to understand that any developer who says that the property will generate an average return of 12–15% per year is only providing a forecast, and here it is important to determine how professional and well-grounded this forecast is.
When deciding to invest in a particular project, it is worth evaluating its competitors, demand, and the number of offers on the market. But most importantly, investors should think about whether the project will remain relevant and attractive to the market in the event of global changes, such as the opening of borders, deterioration of infrastructure, large-scale conversion of industrial locations into residential developments, and other factors. It is essential to examine the financial model of the investment payback in depth. This model shows what the forecasted investment return is based on. If it is unclear how to read it, be sure to involve someone who can help. For example, it may be a warning sign if proposals do not account for depreciation, taxation, or projected vacancy. Also pay attention to whether indexation is included.
To summarize, in order to minimize risks, it is advisable to work with companies that have strong case studies that can be confirmed by existing signed contracts. Before that, however, a detailed analysis of the property should be carried out, and it should be ensured that all permit documentation is in order. If the property is built in accordance with the approved design, it can be commissioned with confidence. And most importantly, clearly discuss how you will exit the project with your investment at different stages.
How to choose commercial real estate for investment?
Despite certain risks, investment in commercial real estate remains an attractive option thanks to stable returns, high liquidity, and fast payback. In order to make a successful investment, several key factors that may affect its profitability should be taken into account.
Location. Even a small shift of several hundred meters can significantly reduce liquidity, which should be one of the key indicators when deciding whether to invest in a property or not. It is worth noting that properties located within city limits are significantly more advantageous compared to those located in suburbs or smaller towns. Key indicators here include easy access to public transport, the availability of infrastructure, and the ability to attract qualified personnel. In the most active cities, real estate will be more liquid.
Market conditions and security. The cost of construction is almost the same throughout Ukraine, while rental rates from east to west differ severalfold. This is related to the security factor, which shapes the corresponding demand in different locations. Therefore, it is better to invest in locations with the highest level of business activity and security. Premises should be selected that are technically more flexible and can meet various business needs.
War risk insurance. The availability of insurance coverage increases the attractiveness of a real estate property. It is important to check whether the property can be insured before making an investment, as this provides an additional level of protection for your capital and for the future tenant.
Developed infrastructure. These are properties that have food service facilities, recreation areas, a sufficient number of parking spaces, a shelter, a conference hall, modern architecture that attracts attention, and other improvements that create added value for the end users of the premises. It is also important to pay attention to the availability of all necessary municipal utilities, sufficient electrical capacity, heating systems, and fire extinguishing systems. Alternative power sources are also currently popular, including solar power plants, diesel generators, and gas-piston generators. This is critically important for any resident of a warehouse and production complex. Such properties are in higher demand and, accordingly, command higher rental rates.
To summarize, an ideal investment property meets all four factors. However, for liquidity, the most important factors are the location of the property within the ring road of any city, but not beyond it, and the availability of developed infrastructure nearby. Everything that is liquid usually has a high price and a high return.
Prestige of the property and its capitalization
In addition to the main factors, such as location, market conditions, insurance availability, infrastructure, and flexibility of the premises, there are several other important aspects. They may not have a direct impact on the profitability of the property, but they significantly increase its prestige and future capitalization.
It is important that the new property in which you invest follows modern trends and the current challenges facing society. Such properties will significantly increase in value and remain relevant in the future. Pay attention to the inclusiveness of such properties. The implementation of an ESG strategy by the company will also be a significant advantage when investing in its properties.
I would also like to draw attention to industrial parks. They are economically attractive to tenants due to tax benefits and the entire ecosystem that can be implemented within them. Residents of such properties receive an exemption from corporate income tax of 18%, as well as exemption from customs duties and VAT on imported equipment. This is a significant advantage for a tenant when choosing your premises.
It should be understood that the further development of Ukraine as a state is impossible without a transition from a raw-material-based economy to an industrial economy. To ensure this, new conditions for business development must be created: real estate properties with high-quality infrastructure, where businesses can operate as efficiently as possible. For example, new production premises provide manufacturers with access to grants and international financing, as they meet all necessary requirements. As a result, this will accelerate the development of new products with high added value and export potential.
Therefore, investment in warehouse and production real estate is a significant contribution to the development of Ukraine’s economy, as it is also an investment in the creation of new products. Some investors adopt this patriotic position and perceive investment in an industrial park as their meaningful contribution to our victory.
Thus, investment in commercial real estate has significant potential for generating stable income, while also contributing to business development and the country’s economy. However, like any investment, it carries certain risks. To minimize them, it is necessary to carefully analyze the market, choose reliable developers, and pay attention to the key factors that influence profitability.
