Why is commercial property so expensive?
Commercial property is so expensive because it takes a lot of money to build, maintain and develop.
Commercial property requires many systems and processes which are both time consuming and significantly more expensive for an individual or business. Things such as security systems, server hosting, security and CCTV all drive the price of a commercial property upwards. Residential homes tend to contain furniture and family valuables such as TV’s etc, commercial premises contain all of those plus sensitive information such as documents and maybe even cash on site for retail units such as shops. These need to be secure and protected which means funds must be allocated to protect them.
Another reason why commercial property can be so expensive is the land on which they are built on. Many commercial premises need to be within places accessible in order to shop there or accessible for HGV’s to deliver goods. Combining these two means commercial retail units in prominent locations can fetch significantly higher purchasing prices than residential homes.
Commercial property is an entirely different asset to residential properties. We explain this in one of our earlier blogs, yet today we’re talking why is commercial property so expensive? There is so many factors which play a part in the reasoning, one being the rarity. At the end of the day, commercial premises are much rarer than residential and for many are the homes of their businesses and livelihoods. These income producing assets is what makes the more valuable. Couple this with the other factors such as building costs and we can start picturing the landscape of the commercial sector.
Supply and Demand
All of these factors are important but they lead to a bigger reason. Supply and demand. Commercial property is in high demand. Many businesses and investors understand the financial gains which can be achieved with purchasing commercial property and although being dynamic and diverse, it is harder for companies to find the right commercial property to occupy as opposed to a house to live. This means they’re willing to pay a slight premium on rent for a property which ticks all their boxes as its rare a commercial asset will be absolutely perfect for a company. In turn this increase in rental yield will drive the freehold prices of the property slightly up.
One last factor to consider is the perception of commercial property. Many people understand residential far better than commercial, therefore not being able to recognise a quality income producing commercial property straight away. This may cause their perception to be of that the premises are too expensive when in fact, taking all factors into play, one will realise why the property is priced at that figure. A commercial unit that’s expensive to a beginner investor or less experienced person may be a bargain to a seasoned investor.
If you’re looking to understand commercial property purchasing. We recommend checking out our previous blogs to start some basic learning of the commercial landscape.