Low interest rates maintain the attractiveness of real estate investments, including for various types.
A trend from 2019 continuing into 2020, the commercial real estate market benefits from favorable conditions and increased demand for office space. Moreover, commercial real estate offers significant advantages. It just requires identifying the right opportunities. According to an EY survey, 79% of investors are favorable to investing in commercial-use buildings.
Analysis of 10 advantages of commercial real estate in this article:
1. Higher rental income
The main reason to invest in a commercial building is the higher potential for income compared to residential property. All studies show that commercial spaces provide higher rental income and profitability than residential real estate. Indeed, for a residential rental property, the gross yield generally ranges between 3% and 5% (depending on the property's location). For a commercial property, the gross yield is typically between 5% and 7%. Generally, commercial properties that meet current trends such as a downtown location or immediate proximity to public transport, flexible interior layouts, pleasant environments, and the use of new technologies offering a dynamic work setting rent quickly.
Moreover, in commercial real estate, there are no "cycles" of price increases or decreases as seen in residential real estate. This concept relates to speculation. In the commercial sector, investors primarily invest based on the current or future yield of the property. This greatly limits the risks of overestimating the value of commercial real estate.
2. Longer lease terms (protection against vacancy)
A commercial tenant stays longer than a residential tenant. Lease terms are generally 5 or 10 years (or more). This difference is mainly explained by the fact that a company invests significant expenses to fit out its premises to meet the needs of its commercial activity.
Regarding termination notice, it is at least 3 months for a residential lease versus at least 6 months for commercial leases.
3. Larger rental guarantees
For residential leases, the rental guarantee cannot exceed the equivalent of three months' net rent (art. 257e para. 2 CO). However, the parties are free to agree on a lower amount.
In contrast, for commercial leases, no maximum limit is imposed by law, and the parties freely set the guarantee. It is generally higher for commercial tenants than for residential leases. In practice, landlords usually require 6 months' rent as a guarantee for commercial premises. Some owners even request a full year's rent as a guarantee.
4. Maintenance and fit-out of commercial premises
Premises are often delivered in shell condition by the owner, which is another advantage for the latter.
The tenant fits out and decorates the interior at their own expense as they wish and according to the needs of their business. These fit-out costs can be very expensive and encourage tenants to stay longer.
Additionally, merchants have every interest in maintaining their premises and storefronts well, as neglect would impact their business. Tenants are generally proud of their activities and want to protect their livelihoods.
5. Landlord-tenant relationship
The relationship between landlords and commercial tenants differs from that between landlords and residential tenants. This professional relationship allows for a better understanding of the "business" aspect of each party.
This commercial relationship helps maintain professional and courteous interactions that are less conflict-prone than those that might occur in residential rentals.
6. Mixed-use commercial zones
Residential apartment blocks have become places accumulating social difficulties; mixed-use commercial zones offer a new opportunity to diversify offerings and adapt to business needs. New projects have demonstrated the benefits of offering mixed-use spaces downtown or near centers, thus providing local commerce to surrounding residences. Le Moulin de Cugy is a good example. Mixed-use buildings thus break the traditional "zoning" logic.
Residential, business, and mixed centers are new living spaces hosting companies, shops, and residents. At the heart of these spaces are new forms of mobility (pedestrian zones, bikes, scooters, intercity trains, greenways, or carsharing) which also positively affect the use of commercial spaces. A mix of industrial, residential, artisanal, office, and commercial zones fosters an ecosystem and diversification of activities on a single site.
The rise of e-commerce pushes brands to adapt. Despite a disrupted sector, the supply adjusts to the market by transforming spaces and their uses. Buildings evolve, and new technologies benefit commercial tenants. Also, using smaller spaces, their layout, or locations closer to residences are new strategies implemented to increase attractiveness to customers. For example, the food sector has opted for closer proximity to customers by opening small branches near residences, often located in mixed-use buildings.
7. Specifics of commercial leases
Commercial leases are not subject to the same tenant protections and requirements as residential leases. Indeed, the regulations and practices governing leases provide some specific rules for commercial premises.
For example, commercial landlords benefit from a right provided by lease law not granted to residential landlords: a lien, called a right of retention, on the tenant's furniture located in the leased premises. In this context, most commercial leases stipulate that the tenant agrees to furnish the premises adequately and maintain them furnished throughout the lease term.
Another example: the law provides for rent adjustments based on 100% of the variation in the Swiss Consumer Price Index (CPI). These are indexed rents that can be increased once per year with one month's notice and using an official formula. According to art. 269b CO, "agreements providing for rent adjustments based on an index are only valid if the lease is concluded for a minimum duration of five years and the reference is the Swiss Consumer Price Index."
8. Protection against inflation
The Consumer Price Index (CPI) measures the evolution of prices for goods and services representative of household consumption. It indicates how much consumers must increase or decrease their spending to maintain the same consumption volume despite price changes.
To measure price changes, a "typical basket" is defined. It includes a representative selection of goods and services consumed by private households. It is subdivided into 12 expenditure categories ("main groups"). Each main group is weighted according to its share in private household spending.
The CPI measures inflation through the variation in the cost of the typical basket.
A lease contract 100% indexed to the CPI evolution is an excellent protection against inflation since income increases in line with the price changes of the basket.
9. Investment possible by foreign persons
According to LFAIE (art. 2, para. 2, let. a, LFAIE), a foreign person can purchase commercial real estate.
"The legislation on the acquisition of real estate by foreign persons contains a series of restrictions on acquiring property or equivalent rights by foreign persons, i.e., those who do not have the right to settle in Switzerland or, for nationals of EU and EFTA member states, those who do not have their legal and actual domicile in Switzerland.
Properties intended for economic activity (properties serving as permanent establishments, such as factories, warehouses, offices, shopping centers, stores, hotels, restaurants, craft workshops, medical offices) can be acquired without authorization."
10. Increase of the reference rate
If lease law provisions apply, a potential rent increase at lease renewal is possible through indexation.
Key takeaways
Commercial real estate offers many advantages, and since diversification is always important, mixed-use real estate (residential and commercial) appears as an ideal solution.
If you wish to make an investment in commercial or mixed-use real estate but do not want to manage it yourself or lack the necessary time, an option is available: investing in real estate crowdfunding. This allows you to invest directly in commercial or mixed-use real estate, be registered as the owner in the land registry, and benefit from attractive returns.
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