The Three Big Challenges Ahead of Commercial Property Market

The Commercial Property market has three big challenges ahead. The first one is the political risk due to the war in Ukraine and its impact on the economy. Secondly, is the increase in residential rents, since higher borrowing costs postpone buying a home? Finally, higher interest rates and returns from alternative investments causing a reprising of commercial property investments which will repeatedly play out during 2023 and beyond.........

Let us take an example.
If the 10-year government bond rate is 2.0%, the risk premium is 3.0%, and the expectation is that capital values will remain broadly flat, then the capitalization rate equals 5%.
The value of a shop that generates an annual rent of €25,000, would be calculated by dividing €25,000 by 5%, which equates to €500,000. So you buy the property for €500,000 and it would generate a return 5%.
Cyprus’ 10-year government bond rate is now 4%, and the risk premium of investing in real estate is now higher due to increased political risk globally and is probably closer to 2.5%.
Therefore, the expected growth in capital values is negative. 4% plus 2.5% means that the capitalization rate is closer to 7.5%.
As the population of Cyprus is increasing due to immigration, and commercial rents continue to adjust to a growing economy, let’s assume that the property’s rent is expected to increase by 25% to €31,250. At that rent, using the capitalization rate of 7.5%, we would have a capital value of €416,000 and a decrease of 20% compared to the original €500,000.

To ensure financing sector resilience, stress-testing large declines in commercial real estate prices should be conducted to inform decisions regarding the adequacy of capital buffers for commercial real estate exposures. Banks’ commercial real estate valuation assumptions should also be reviewed to ensure that provisions are adequate.
As the stock market tends to work more efficiently than the property market, it is expected that significant reprising will likely take place next year as the increase in interest rates, heightened political risks, and higher returns from alternative investments are priced into property assets.


Did you miss our previous article...
https://trendinginrealestate.com/commercial-real-estate/buckle-up-the-us-housing-market-is-about-to-get-slammed