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What a good residential market means for commercial real estate

Categories: Commercial, Investments

Residential and commercial market reports are chalk and cheese. But when us commercial property investors hear of good news in the residential property market, there are many reasons why we get excited.

Residential and commercial market reports are chalk and cheese. But when us commercial property investors hear of good news in the residential property market, there are many reasons why we get excited.

This is because key drivers of residential real estate are closely aligned with those drivers that push the commercial market. In fact, in many instances, these drivers are the same.

If it’s good for residential it’s probably good for commercial

Why do we look to the residential market to assess how the commercial real estate market is performing or is likely to perform in the future?

Well, typically us commercial property investors don’t. We have our own key indicators and forecasting mechanisms that tell us how a commercial market is likely to perform in the future.

Don’t mistake us in thinking that investing in residential property is similar to investing in commercial real estate. The two markets are completely different. You can learn more about investing in commercial or residential property here.

But when we see positive headlines for residential property, we can’t help lifting a thumb. Because many of the same tailwinds that push residential forward will likely do the same for the commercial property market: 

Population growth

Population growth can be a great indicator of housing demand.

More people in a given country, city, or precinct, means more homes are needed over their heads.

population growth impacts real estate

A growing population also means a hungry population. It means a greater number of people are hungry for goods and services to satisfy their lifestyles. People want cars, clothes, and white-collar services to handle their day-to-day obligations, like accounting firms, financiers, medical practitioners, and legal service providers.

So, more retailers are required to sell those goods. More logistics and industrial businesses are needed to transport them (especially those purchased online). And more commercial spaces are needed for those businesses who provide the many services a population demands.

And, just like residential property demand increases as a result of population growth, commercial real estate demand does too. Because the bigger the machine, the more cogs are required to ensure it operates smoothly.

Economic growth

If the residential market is heating up, then it’s likely the economic climate is too. This is good news for investors. Here’s why.

Economic growth is measured by the change in Gross Domestic Product (GDP) each year. And GDP is a measure of all the goods and services a country is providing.

So, because income is typically derived from GDP, it’s safe to say that most paychecks will increase with an increase in GDP. This income is then – in many instances – put toward buying or saving for a home.

Studies across Asia, Europe, and the States show that median house prices correlate with GDP by as much as 60 per cent to 95 per cent. If one grows, then the other does too.

Commercial real estate has the same relationship with GDP. An increase in income enables investors to place their capital in alternative investments.

So, if we see house prices increasing as a result of a rising GDP, it’s good news for commercial property investors. The value of their investment is likely to increase too.

Low interest rates (means more disposable income)

Australian interest rates are at a historical low. Currently at 0.10 per cent, the minuscule cash rate translates to incredibly low mortgage interest rates, putting more money in people’s pockets – or freeing up more capital for investment.

More renters are considering buying a home because the $500 per week they’re paying to landlords could be put to paying off a mortgage on their own home. Low interest rates commonly signal (and are commonly used as a tool to drive) property demand.

It also means that existing homeowners and those who are interested in other investments, have greater disposable income. They’re spending less on mortgages, credit cards, and personal loans, and they have greater propensity to invest elsewhere. Say, commercial real estate.

And when a hoard of investors throws their money at a particular asset class, the demand fuels property value growth.

Proof of a good investment

So, if the economy is picking up, disposable income is high, and a growing population is looking for somewhere to invest those funds, why is real estate a good investment?

For investors that can cope with illiquidity, real estate can provide all the desirable characteristics that an investor swoons for:

  • Long-term income;
  • Stability and protection from market volatility;
  • Potential for capital appreciation; and
  • The ability to diversify their existing investment portfolio.

This is unlike bond yields and deposits, which are currently at an all-time low (thank the low interest rate environment), and shares, which are notoriously volatile.

If the residential property market is picking up, then consider the outlook for commercial property investment. You’ll find that industrial, retail and office property markets might soon have their own good news stories to tell.

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