If you have money to invest in real estate, you immediately think of property for residential use, to own your own home or to rent it out. However, specialist Property Developer Tim Archibald agrees in saying it: the most interesting investment, because it is highly profitable and of course more secure, is for commercial real estate. Here’s why.
A Still Unknown Universe
The commercial real estate market, or corporate real estate, is rarely chosen by private investors. The reasons are many and varied:
- Because individuals cannot imagine owning professional or commercial premises;
- Because they think it is an area reserved for real estate professionals and institutions (banks, insurance companies, funds, etc.);
- Because they cannot imagine the high returns of this type of investment;
- Because there is little advertising for this type of property.
These 4 arguments can be grouped into one, essential: potential investors simply lack the information, time and expertise to deal fully with the facts of the commercial real estate sector, which seems beyond their reach.
For lack of mastering the codes, they are more inclined to turn to rental residential real estate, which admittedly has lower yields and is subject to more restrictive regulations, but which appears easier to access and represents a source of income without major risk-taking.
Commercial Real Estate, a Niche Market?
Although it is relatively confidential and exclusive – because it is punctuated by monetary exchanges with 6 digits minimum, and going up to several million euros – commercial real estate is however not at all a niche market.
For example, in European countries in the first quarter of 2015, the total amount of investment in business real estate reached 3.6 billion euros; 4.7 billion euros for the whole of the country. These are therefore not transactions that concern a very small fringe of real estate investments.
What are the Advantages of this Type of Investment?
Investing in commercial real estate has many advantages detailed here. Here are which ones:
- Profitability is higher than in real estate for residential use: between 5 and 8% for professional premises or an equipped office, against 3% for inhabited accommodation.
- The charges are to a large extent attributable to the tenant of the premises or office.
According to Tim Archibald Christchurch, the demand is high and companies decide very quickly not to miss a good opportunity. Demand is increasing in particular thanks to the rise of start-ups looking for premises.
Leases are on average longer; the owner is therefore assured of the occupation of his property over a longer-term.
Another important argument: commercial real estate seems unsinkable. Despite the crisis that has plagued the world economy since 2008, this sector has not been impacted by financial difficulties, while rents (professional and private) have tended to fall.
According to this analysis, the annual internal rate of return on the commercial property would reach 10.23% for the last decade, and 7.28% for the past 5 years, those of the bulk of the crisis. Suffice to say that this type of investment is relatively well protected from economic conditions. For more info contact Tim Archibald Property Developer and adviser in New Zealand.