What are Commercial Properties as an Investment?
Investing in commercial properties is among the 3 most popular types of real estate investments, alongside residential and industrial properties. A commercial property is defined as one where the tenant is a business or company. While some businesses prefer to purchase the properties they occupy, most companies choose to rent. This allows the property owner or investor to receive periodic rental income from the tenant.
Commercial properties are a great option for diversifying any investor’s savings.
Advantages of Investing in Commercial Properties with Tenants
Attractive Returns
Typically, the return on investment from commercial properties with tenants, through their acquisition and subsequent rental, is higher than residential properties, with percentages ranging from 5% to over 7%, and even up to 8% or 9%, depending on factors such as how the property was purchased and its location—whether it’s in the city center or on the outskirts. The closer a property is to the center, the lower the return will be, but it will be safer. Conversely, properties further from the center have a greater chance of yielding 8% to even 10% returns, but with higher risks of vacancy and having to rent again.
Continuous Cash Flows
The main characteristic of investments in commercial properties is that they provide periodic benefits. These benefits come from the rental income of the property. Rental income is a continuous revenue stream that amortizes the initial investment, providing a constant return.
Tangible Asset that Helps Reduce Risks
Like any property, commercial properties fall under the category of tangible assets, which can be physically touched and felt, in contrast to financial assets, which generally behave differently from real assets.
Longer and More Flexible Lease Contracts
These types of properties generally have protected rental agreements and longer lease contracts. This provides greater transparency and predictability regarding rental income, which translates to more visibility of future project benefits. Moreover, the legal framework for operating these leases is more flexible than residential leases, allowing investors to adjust their exit strategy or property sale, taking advantage of growing markets.
Factors that Affect the Profitability of Commercial Properties
Location: Center vs. Outskirts
The closer a property is to the city center, the lower its return, but the investment will be safer. Conversely, properties on the outskirts have a higher chance of reaching 8% to 10% returns, but with higher risk of vacancy.
Sources of Profitability
It’s important to remember that the profitability of this type of real estate investment comes from two sources: sale and rental.
Comparison with Other Real Estate Investments
Given the good performance of these assets and the volatility of the markets, choosing to invest in a well-located commercial property in a major city not only provides a return on investment but also generates substantial capital appreciation, significantly increasing the performance of our investment. Studies, such as those by Idealista in January 2023, show that the return on this type of investment can double, in the worst-case scenario, the rates offered by 10-year Government Bonds (3.5%).
Market Trends for Commercial Properties in Spain
The market for commercial property investments in Spain grew by 120% in 2022, according to real estate consultancy Savills in its June 2, 2023 report. The commercial property investment segment recorded the highest transaction volume with 742 million euros, followed by supermarkets, which continued to be a favored retail segment for investors, with over 657 million euros. So far this year, the share of both segments remains at 27%, though medium-sized properties are starting to attract more attention, capturing 38% of the total.
Tips for a Safe and Profitable Investment
Prime or Central Locations
To reduce risks and ensure a profitable real estate investment, it’s advisable to invest in properties located in prime or central areas of cities to guarantee a steady flow of public interest and demand for purchase or rental.
Value Increase through Renovations
Depending on whether you purchase a property from an owner who is retiring with a tenant already in place, or if you carry out renovations to improve or transform the property, you can achieve a significant increase in its value upon resale.
Conclusion
Investing in commercial properties presents a solid investment alternative with high certainty and control. Commercial properties are highly valued investment products, where, depending on the location and pedestrian traffic, optimal spaces can be found for a safe, short-term and long-term investment.
