How is commercial property investment different from residential property investment?
By Advantage Property | 23rd Jul 20
Besides the fact that both involve property, there are few similarities between these two types of investment. Everything from the average lease length to the level of risk is different. How you approach one varies greatly from how you approach the other.
One of the key points of difference revolves around the lease. Commercial leases are much longer and unlike their residential counterparts, play an important role in determining the value of a property. This is because it’s much harder to replace a commercial tenant than a residential one.
The demand for commercial properties is far more elastic than the demand for residential properties. This also means that the vacancies between commercial tenancies tend to be far longer than those between residential tenancies. Coupled with the sector’s increased vulnerability to broader economic shocks, this is why commercial properties need to offer greater yields to attract investors. If the returns weren’t as high, investors would often baulk at the risks.
That’s the long and short of it when it comes to explaining commercial property investment to residential investors: the risks are greater and the returns can be higher.