In recent months, commercial real estate has seen a large growth in demand but what exactly is driving this? There are a few external factors that have accelerated this surge and overall attractiveness of commercial real estate property.
Low interest rates equal cheap cost of debt. In order to maintain jobs and keep business going, throughout the pandemic, Governments worldwide have injected unprecedented levels of money into their stressed economies. For the same reason, central banks have reduced interest rates and the cost of debt. The combination of more money flowing in economies and cheap loans has significantly increased demand for investment assets across just about every asset class. We see this very clearly in the massive increases of the past 18 months in the price of traditional investment assets such as company shares traded on stock exchanges, Government bonds and real estate especially, residential and commercial.
Investors are looking for higher yields and returns. As the residential market is becoming more expensive and harder to secure property, commercial property stands out as a better investment alternative. For commercial property investors, yields are typically much higher than residential property. Yields from commercial property can be anywhere from 5% to 10% whereas residential property could sit between 1% and 3%. Leases for a commercial property are generally much longer than residential, in most cases ranging between three-ten years, providing you with a reliable income stream once you find your tenant. It also means less changes for tenants so you’re not out looking for a tenant every year.
Institutional investors, investment trusts and offshore buyers contribute to demand. The above conditions make a case for searching more widely for secure and attractive investment assets which may not yet have attracted the interest of many investors. It could be argued that commercial real estate has relatively been overlooked compared to other asset classes. These favourable conditions for investors such as cheap cost of debt and high yields have therefore increased the demand of commercial property, especially in the industrial and logistics (I&L) sector aided by the exponential rise of e-commerce.
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