Ground-floor retail lags housing: the 6-8% price of that gap

Ground-floor retail has risen less than apartments, and that's why it yields more

Outside the good shopping streets, many commercial premises are worth today the same or less than ten years ago. Online shopping and the closure of small shops have left empty ground-floor units in neighbourhoods, and the price of retail space has corrected where housing has barely moved. The result is a gross yield that, according to a calculation circulating on the forum, stands at around 6-8% a year for a commercial unit versus 4-5% for an apartment. That differential is not a gift: it is the payment for a higher risk.

Why retail has risen less than housing

The first reason is that they are valued using different criteria. An apartment is bought by a private individual and its price is set by the mortgage payment they can sustain over 30 years. A commercial unit is bought by someone with a calculator: price equals net income divided by the cap rate. When rates rose in 2022-24, cap rates widened and retail fell 15-25% in Europe while housing corrected 2-3% and rebounded. That's half the gap.

The second is physical oversupply. The United States has 22-24 m² of retail space per capita; Western Europe, 4-5. There was a building frenzy in the 2000s and demand moved online, with online peine stabilised at around 25-27% in the UK and Germany and 18-20% in Spain for non-food goods. The surplus square metre doesn't rent out at just any price.

A year empty, self-employed tenants going bust: the real cost

The extra yield is the payment for a higher risk. An apartment rents out in days or weeks; a shop in a weak neighbourhood can sit empty for a year or more, and that eats up several years of yield differential. If the business fails, it stops paying. Many tenants are self-employed or small businesses. And the contract does not trinc residential tenancy rules, but the freedom of agreement between the parties.

There is a tax detail that gets forgotten and changes the math: renting out commercial premises or an office carries 21% VAT charged on top of the rent, and the tenant withholds 19% income tax which is paid to the tax authority on behalf of the owner. Residential rent is exempt from VAT by law. The owner of a ground-floor unit collects with a surcharge and a withholding; the apartment owner, clean.

From haberdashery to micro-flat: converting the ground floor

The phenomenon seen in several cities is the conversion of ground-floor units into housing. Buildings from another era, with a ground floor meant for the haberdashery or the neighbourhood bar, are left without successors. Instead, corner units of 90 square metres or more converted into three and even four micro-flats appear, each with its own door, window to the street, letterbox and meter panel. What's unknown is whether they are studios separated by plasterboard with shared bathroom and kitchen, or how they are organised. The conversion requires an architect's project, legal changes and paperwork, and once done, the price is no longer that of a commercial unit: five years ago these ground-floor units were practically being given away.

In Valencia and the surrounding area the trend is described the same way: shops on secondary streets are worth little as commercial space and are converted into housing or Airbnb-style hostels; those on the main streets are extremely expensive and only within reach of multinationals with high margins, or of those using the business for other purposes.

The bottleneck: obscene prices with little foot traffic

The underlying complaint is that, apart from a few streets in each municipality, most premises see very little footfall, meaning few potential customers, and yet high prices are asked. Anyone looking for a small unit to use as storage finds that the opportunities they let pass no longer exist. And anyone looking for one to live in faces an added problem: if the owner finds out the use will be residential, the negotiation changes.

The analysis stalls right here. The return on paper favours the ground-floor unit, but the vacancy risk, the tax treatment and the conversion depend on the exact street, and there is no aggregate statistic for that.