How economic inflation can benefit commercial property

By Greg Bell

The inflation rate in Australia has been increasing and is expected to persist. This is attributed to various factors, including the pandemic's economic impact, natural disasters, and the recent invasion of Ukraine by Russia, among others.

Consequently, many property investors are exercising caution, as high inflation can lead to market uncertainty. Fortunately for commercial property investors, the rise of inflation may prove beneficial — let's explore how.

Three ways commercial property investors may benefit from inflation

Throughout previous periods of economic instability and inflation, commercial property has demonstrated resilience in maintaining, and even increasing, its value.

While commercial real estate remains susceptible to market fluctuations, it has established a reputation as a comparatively steady and dependable investment choice for individuals seeking consistent long-term returns.

Inflation escalator clause

The contractual agreement of a commercial property differs from its residential counterpart, with one notable distinction being the inclusion of an inflation escalator clause. Historically, commercial real estate has a reputation for resilience, partly because commercial leases typically account for inflation by including provisions for rent increases tied to economic indicators.

The inclusion of inflation adjustment clauses offers investors a level of stability and predictability, particularly significant given the extended lease periods that often exceed five years.

Increase in rental income

Rising inflation typically results in an increased cost of living, which may prompt landlords to adjust their rental pricing to reflect the upsurge in their expenses. As a consequence, investors in commercial real estate may potentially benefit from augmented rental income, leading to higher returns on their investments.

Notably, commercial properties that provide long-term leases to established tenants, such as prominent retail chains or supermarkets, are favorably positioned to profit from inflation. Such tenants may have a greater propensity to absorb rental rate hikes due to their well-established customer base, enabling landlords to reap the benefits of a stable stream of rental revenue.

The escalation of rental rates due to inflation can also have adverse effects on commercial property investors. The Australian CPI indicator has revealed a rise of 6.8% as of February 2023, implying that landlords who set their rental prices too aggressively may face the risk of losing tenants who cannot afford the increased rates, resulting in a potential loss of rental income from vacancies.

Therefore, it is crucial for commercial property investors to strike a balance between accommodating for inflation by adjusting rental rates and ensuring that the rates remain competitive in the market.

Appreciation in property value

Inflation-induced appreciation of property value is a possible benefit for commercial property investors. The rising cost of goods and services can raise the value of tangible assets, such as real estate. This increase in property value, in turn, may provide additional equity to investors.

However, property value appreciation during inflation is not a foregone conclusion. It is affected by a variety of factors, including the commercial property's demand and location.

Therefore, before investing in a commercial property, investors should conduct extensive research and seek advice. Visit our homepage to explore commercial property investment opportunities in the Gold Coast. Our team of experienced advisors can provide valuable insights into the local market and help you identify viable investment opportunities.

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