Making a higher return by investing in the transformations of office buildings (CRE)
Investing in residential property (residential houses) has proved to be a lucrative way to make returns in recent years, but purchase prices are now considerably higher than before. Partly because of this, returns on such investments are sometimes under pressure. Investing in commercial real estate (CRE) is a good alternative, partly given the scarcity in the housing market in the Netherlands and the vacancy of offices and commercial properties. Transforming these properties into residential property can be a good earning model for professional investors. Profitable commercial properties must also undergo a transformation due to a changed use related to corona. Returns on such properties will drop as a result.
ESG (Environmental Social Governance) is "the" new upbeat for the real estate industry
In short, these (ESG) factors are a model for the modern sustainable investment. Sustainability will become increasingly important in the future. A building that is climate neutral will fetch much more in sales. Sustainability will also become much more important for leasing (level of rent). Buildings that stand for diversity (mixed zone buildings) retain their value and give a higher return than buildings that are not adapted to the present time and the new demand. By investing in Commercial Real Estate such as commercial real estate and former office buildings, you are diving into a niche where there is still a lot of money to be made but also special expertise is required. Various market players, such as international investors, banks and (local) governments are already increasingly focusing on the new future.
Coronavirus is going to have a lasting effect on real estate
The virus has had a negative impact on returns in corporate real estate. Before corona, employees worked at home an average of one day a week. Once the virus was driven out, office workers wanted to work from home an average of two days a week. This is according to research by Rabobank. With more working from home, office premises will become vacant and there will also be different demands from employees. With investments in CRE, we can partly solve the housing problem in cities, on the one hand, and shape new uses for offices, on the other. Investing in such transformations also offers the prospect of nice returns.
Not betting on one horse
Rentals you have made nice returns in recent years. By also investing part of your assets in Commercial Real Estate, you will bring diversification to your investment portfolio. By investing in Commercial Real Estate, you will be dealing with a different branch of business, namely investing heavily in transformations. The big advantage is that Commercial Real Estate has not increased in value as much or even decreased in value. In the current state of these buildings, there is sometimes no money to be made from them. This is because companies need much less square metres compared to the years before the corona crisis and also many buildings do not meet today's ESG standards.
Commercial Real Estate does require different skills
Transforming properties to other uses does require a different approach and way of thinking. For example, you need to be able to estimate well what the conversion costs will be and for what amount you can eventually put the property back on the market. Permit applications and financing transformations are also completely different. Above all, do not be put off by this.
Also pay attention to changing regulations
There are plans to discourage property investment. This could include a five-year self-occupancy obligation on purchased properties. What the changes of the future will be remains to be seen, but do take the announced options into consideration when investing in real estate. I would be happy to update you on this too. At Vastgoedfinance.com, we know where the challenges and opportunities lie and what you are up against in such processes/transformations. We have been moving into this market for a long time and have seen this trend at many meetings and conferences/fairs where the market is much discussed in the Netherlands. You can reach me, Jeffrey Strik, by phone on 0642149847.
