Understanding how Commercial property is affected by supply and demand. commercial property Location and quality are also important. can rise or fall A tenant that defaults (in other words, doesn’t pay their rent) can significantly affect in value your returns. There are four key factors that affect the performance Location and quality of a commercial property investment. The highest-quality buildings in the best locations (which Supply and demand are known as prime property) attract the highest rents. When the economy is doing well, businesses prosper and However, a property’s status can change. For example, a look to expand, which means they need more space. prime retail shop might be downgraded if it is not looked This extra demand means that tenants will be prepared after by its owner or if a new shopping centre up the to pay higher rent, which generally feeds through to road takes away some of its customers. higher property values. In contrast, a downturn means Of course, there can be positive changes as well, such as an businesses are likely to cut back on expansion plans or industrial property being turned into a retail warehouse, even reduce the number of people they employ. This can which normally means it can charge higher rents. depress rents and property values. The difficulty in buying and These effects are exaggerated by the time it takes to selling property build commercial property, as the construction of new Unlike many other types of investment, property is quite buildings often lags behind rising demand. Equally, when difficult to buy or sell. The process takes time and there demand falls away, the buildings are still there, so there is no guarantee either that buildings will be available may be more available than are needed. to buyers or that sellers will be able to find a buyer. (To The financial strength of the use the technical term, property is less ‘liquid’.) This can tenants mean that, if a property needs to be sold quickly, its If a tenant is financially strong, they are less likely to value can suffer. Also, buying property requires a large default, so rental income can be more secure. A longer initial investment. lease also means greater security for the owner. This is important because default is one of the key risks in property investing. After all, if a tenant goes bust, the rent stops being paid and the owner’s costs rise. 6