Makhosini Ndlovu
In commercial property investment, there’s no substitute for comprehensive due diligence. A property may look like a smart buy on the surface, but without rigorous checks across multiple dimensions, investors run the risk of overpaying, acquiring investments that underperform, or getting locked into an asset they can’t leverage.
There are three particular focus areas that are critical to every due diligence exercise:
Property information risk:
This is about understanding the asset itself, especially what exactly it is, what rights are attached to it and whether it’s legally and structurally compliant.
The place to start is with the ownership type. Is it freehold, sectional title or leasehold?
Each structure comes with its own implications for tax, control, and resale. You need to have a clear idea of what you intend doing with the property, even in the distant future, and ensure that the ownership type fits with your plans.
Next, investigate zoning and bylaw compliance. A surprisingly common error made by investors is acquiring a property that’s being used for commercial purposes, but is, in fact, zoned residential.
Another critical consideration is building plans and site boundaries. Properties that have been illegally extended, overbuilt, or encroach on municipal land may be subject to fines, demolition, or legal disputes. It’s imperative to ensure that the gross building area (GBA) and gross lettable area (GLA) match approved plans and are correctly reflected in valuation models.
Property risk:
Beyond the paperwork, investors must assess the physical and locational viability of the property they are considering. Where it’s located, how it’s designed and what services are available all feed into its long-term potential.
Location still matters. High-vacancy nodes with sluggish growth are harder to lease and offer weaker capital appreciation. As a prospective investor, you need to assess comparable sales, supply and demand dynamics, and future growth prospects of the area.
Careful consideration of the property design and layout is also vital. For retail properties, ease of access and customer flow can impact tenant performance. For industrial sites, turning circles, loading docks, and road access need scrutiny.
Remember that properties that are poorly configured tend to sit vacant for longer or require you to lower your rental income expectations.
Then there’s infrastructure risk. In many SA metros, services like water, electricity, and sewage are generally more reliable – but that’s certainly not guaranteed. In rural or outlying areas, property investors may have to fund these services themselves. Even in cities, frequent service disruptions have forced landlords to install boreholes, backup power and waste systems – adding to both capex and maintenance costs.
Environmental risk must also be factored in. Properties used for activities involving chemicals, fuels, or industrial by-products may require environmental approvals and generate higher ongoing compliance costs.
Cash flow risk:
Even if a property is sound and compliant, it’s the income and cost projections that ultimately determine its viability as an investment. Many deals fall apart because of flawed assumptions about what the building will earn or how much it will cost to run.
A proper review starts with the tenant profile. Are the tenants’ national brands, government departments, local businesses, or SMEs?
Lease terms also require close analysis. It’s not enough to know that a lease exists. As an investor taking over an existing lease, you need to investigate any clauses for early exits, escalation structures, tenant improvements and renewal rights.
It’s also worthwhile to look at lease renewal history as a proxy for tenant stickiness. If tenants have been renewing over multiple terms, the odds of retention are high, even if the current lease is short.
Then there’s cost forecasting. Maintenance, property management, insurance, security, and municipal rates need to be stress-tested under different scenarios.
Properties with ageing infrastructure, specialised fittings or complex services will require higher OPEX – and that needs to be fully integrated into the long-term financial model.
Due diligence is ultimately about control:
Thorough due diligence doesn’t guarantee a perfect investment, but it significantly reduces the chances of being blindsided by unexpected costs or unforeseen legal requirements or vacancies.
Thorough due diligence gives you, as the investor, greater control over risk, expectations, and performance. In a complex and often volatile property landscape, that control is often what separates successful strategic investors from ‘hit-and-miss’ opportunistic buyers.
Makhosini Ndlovu, Product Head : Commercial Property Finance at FNB. He writes in his personal capacity.
