One of the first questions people ask when considering investing in Tanzania is whether to invest in commercial or residential property. To be honest both can be profitable but which one depends on your budget, time and type of income you are wanting. Many first time investors will think it’s purely about the price but there are many other factors. The length of leases, tenants and tax on the rental income will impact how you feel owning it. Let’s break it down
Table of content
- The Quick Comparison – commercial or residential property
- Rental Income and Returns
- Length of lease and tenants
- How Much Money You Need to Start
- Tenant Demand for Commercial and Residential Property in Dar es Salaam
- Running the Building Day to Day
- Which Investor Fits Which Property
- Taking the Final Decision
The Quick Comparison – commercial vs residential property investment
- Rents are usually higher for commercial property
- Length of lease can be 3-5 years for commercial and 1-2 year for residential
- Easier to get into residential property. Commercial will usually require more investment.
- Residential properties attract individual/family tenants. Commercial properties attract business tenants.
- Commercial property rental is generally subject to 18% VAT. Residential property rental is generally not subject to VAT (Check with TRA or your tax adviser).
- Commercial property includes lift, generator and service charge whereas residential is more about the property itself.
Rental Income and Returns
The returns you can receive from investing in rental property varies depending on the area and quality of the building. However, residential property investment in Tanzania will often have gross yields of 6-8%. Good quality commercial properties can offer around 8-10% due to businesses paying more per square meter for a good location.
Commercial rental incomes often have set increases. Many commercial properties have a set annual increase of 3-10% built into their leases. Residential rents are usually reviewed when the lease comes up for renewal.
Neither is better than the other. Commercial will give you a higher return. Residential will give you a stable return however apartments in popular areas such as Masaki, Oyster Bay and Mikocheni will always be in demand.
Length of lease and tenants
Companies will use their office or shop so will plan for the future. Because of this commercial properties often have long leases of 3-5 years or longer. Moving a company is a big task so often the tenant will be happy and stay.
Residential properties will attract professionals, expats and families. The leases are shorter (often 12-24 months) and often the rent will be paid in advance (6-12 months in Dar es Salaam). This leaves the landlord with a good cash flow from the start of the lease.
How Much Money You Need to Start?
Residential investments are a great place to start. You can purchase an apartment or smaller property and then scale up by investing in more units as your income increases.
Commercial property in Tanzania will tend to be higher investment. Retail units, offices and small buildings will cost more to buy. You may also need to invest in some fit outs if you want good paying tenants.
Whatever you decide to invest in you should always expect to spend more. You will need to pay transfer costs including stamp duty (usually 1% of the property value in mainland Tanzania) and legal fees.
Tenant Demand for Commercial and Residential Property in Dar es Salaam
Commercial real estate in Dar es Salaam will usually have high demand for good quality buildings in good locations. Businesses will look for –
- Reliable power backup and water.
- Good parking.
- Security and controlled entry.
- Easy access for staff and clients (ideally within 20-30 mins of where most of their staff live).
If the building is energy efficient then it will stand out for investing in office space in Tanzania. Companies love low running costs. Residential properties will attract those looking for somewhere to live close to where they work, schools and shops. Often it can take between 20-40 mins to travel 10 km around Dar es Salaam depending on the time of day. Tenants will pay well for the right area. The closer to the office the higher the demand.
Running the Building Day to Day
This is where you will start to notice the difference between the two.
Commercial properties will have lots of systems. Lifts, generators, air conditioning, water tanks and security will all require regular maintenance. There will be service charges to ensure the building is maintained well and tenants will expect clear invoicing and fast responses.
Residential properties are less complex however tenants will care about the plumbing, painting, fixtures, internet and how quickly small repairs can be completed. If the property is well maintained you will get renewals.
The main factors to consider are –
- Finding the right tenant.
- Having clear leases with set increases, repairs and renewals.
- Having a clear response time for maintenance (in hours).
- Clear monthly statements.
Which Investor Fits Which Property
First time investors – Residential is generally where you should start. You’ll get to know the market and receive a stable return. First time investors should look for stable monthly returns and easy reporting. A professionally managed building will provide both.
Business owners – Purchasing a commercial unit will allow you to use part of the unit and let the rest. The rental income from other tenants will help offset your costs. Owner occupiers should look for a manager who will keep tenants happy without interrupting your business. A professionally managed building will do this.
Portfolio or Diaspora Investors – Often a combination of both works well. If you’re managing your investments from afar look for a single point of contact and consistent reporting across all your buildings. A professionally managed building will allow this.
Taking the Final Decision
If you would like to see both properties being well managed Endow Management have been managing residential and commercial properties in Dar es Salaam since 2014. We have managed buildings such as Vijana Mall and The Wave. We source tenants, manage leases, complete maintenance, collect service charges and provide security. Seeing a well managed apartment block and office building will really help you see the differences.
No matter which you decide on visit the building, get everything in writing and look at at least 3 options. Both residential and commercial property in Tanzania will provide good returns if you are patient and have a clear plan.
FAQs
1. Should I invest in commercial or residential real estate in Tanzania?
Neither is better for everyone. Commercial buildings will generally have a higher rental per square meter and longer lease terms. Residential will have lower capital requirements and a broader tenant base. If you are a novice investor residential is often easier to start with. If you have more capital and would like a higher income then commercial is definitely worth considering.
2. What rental yield can I expect in Dar es Salaam?
Residential properties are often quoted at around 6%-8% gross yield. Good quality commercial buildings can offer around 8%-10%. This will depend on the location, quality of the building, occupancy & running costs. Always calculate your net return after service charges, maintenance & tax. Never compare two properties without knowing the net returns.
3. How much capital do I need to invest in residential real estate in Tanzania?
You will usually start with one apartment or small house. You will have additional costs on top of the purchase price. These will include transfer costs such as stamp duty (generally 1% of property value on mainland Tanzania) & legal fees. It is a good idea to have a small amount of money aside for the first few months of maintenance.
4. Do I charge VAT on my commercial rental in Tanzania?
Commercial rental will generally be subject to VAT (18%). This will only be charged if the landlord is VAT registered. Residential rental is generally exempt. VAT rules & thresholds can change so please check with the Tanzania Revenue Authority or tax adviser. This will affect how much your tenant will pay.
5. Should I invest in office space in Tanzania?
Yes you can. If the building is in a good location with reliable power, water, parking & security then they will often have a longer lease (3-5 years). If the building is well managed tenants will often stay long term. Just make sure you check the location, tenant mix & service charges.
