Every investment comes with risk. Investors know that. Yet there are still reasons why investors fear commercial real estate investment. Here are six fears we commonly hear – and how investors can alleviate them.
Investments come with risk. And investors come with fears. In commercial real estate investment, the fear to invest can be that much more pronounced because it’s not as popular investment as residential real estate or stocks. And as most of us know, uncertainty and inexperience can lead to fear.
These are the top 6 fears that prevent investors from investing in commercial property:
- Economic uncertainty
- Market volatility
- Tenant risk
- Natural disasters
- Government regulations
We’ll dive into each, and show how fears can easily be alleviated by using proven property fundamentals.
The most common fears of commercial property investment:
Economic instability, rising interest rates, increasing inflation… These can push and pull on commercial property values and their potential to earn a strong, long-term rental income.
If interest rates rise, then investors are going to see a narrower gap between the income they might generate and the finance costs they’re obliged to pay. Considering how important cash flow is for most passive income investors, this can be a big loss.
That said, commercial real estate is renowned for its strong yields of about 5 per cent to 8 per cent (and sometimes higher). A lot of the time commercial property investors can find protection against rising interest rates and inflation thanks to a high-yielding commercial real estate investment.
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Rapidly changing market conditions is relatively rare in commercial real estate. Because properties aren’t transacted on frequently (like shares are), their values tend to hold for longer periods of time.
That said, there are factors that can influence the market and force property values to move.
As we’ve mentioned, rising interest rates can be one of those factors. High interest rates can impact rental return because businesses might be more cautious about the future, reducing their spending and their demand for high-end commercial premises. Vacancy rates can rise as a result. But the good news is that businesses almost always need a central location to conduct their business.
The solution for investors is to adopt a long-term perspective. Commercial real estate investment is for players of the long game; it’s not typically for those wanting quick, overnight wins.
Tenants are the lifeblood of a commercial premises. After all, they’re the ones paying you an income.
That’s why the loss of a major tenant can have a significant impact on the value of a commercial property because most of the value is derived from the occupant via the lease agreement they’ve signed with you.
So, to ensure the continuous arrival of rent each month, investors need to have an attractive and relevant commercial premises to offer the tenant market. Once the tenant is in, a good landlord will listen to the tenant’s gripes and ensure the premises fits their needs, not just today, but tomorrow as well.
Natural disasters, such as hurricanes, earthquakes and floods, can cause significant damage to commercial properties, and in turn reduce their value.
Realistically, the chances of your property seeing major damage from a natural disaster is probably low. But in regional areas, the likelihood of rain, flooding or fire damage does increase.
This is where insurance comes in. Adequate insurance is crucial, not only to avoid the huge monetary pitfalls of a low-chance event like a natural disaster, but to avoid the panic that may set in when new headlines show a flooding or fire in your regional property’s area. Having a good property manager providing regular communication during these events is also critical. You’ll want to be constantly updated and prepared for any eventuation that may lead to repairs or a loss of rental income.
Changes in government regulations, such as new zoning laws or environmental regulations, can have a negative impact on the value of commercial properties.
That said, it can also positively impact the property’s value.
Rezoning of a district is one way of drastically strengthening the value potential of your property. We’ve bought properties knowing that the local government were planning on rezoning the locales, and our investors have handsomely profited because of these sort of investment strategies.
Understanding the market will alleviate the fear
Fear can stop investors in their tracks. It’s what prevented so many investors from entering the market in 2021 and 2022, while the pandemic (and subsequent rising interest rates) caused uncertainty. Those investors missed out on one of the biggest periods of property market growth in Australia for over a decade.
That’s why investors should always be cautious, but always stick to property fundamentals when looking to buy their next (or first) commercial property. Risk always exists, no matter the investment. It’s your ability to make solid investment decisions that will help reduce that risk.
Want help investing in commercial real estate? We’ve provided our investors with reliable yields for over a decade. Get in touch with us today to learn about our upcoming syndicated investments and how you can invest alongside us in a secure passive property investment.
Properties & Pathways is a dynamic Australian property investment company. Our completed syndicates have provided investors an average annualised return of 21.97%. For more information on how you can invest alongside us, get in touch today.