Commercial property is any piece of real estate that is used for business and commercial activities. Usually, when people refer to commercial property they mean buildings that house businesses, but it could be any land used to generate a profit, as well as large residential rental properties. The designation of a property as a commercial property is determined in the way it is financed, the way it is taxed, and the way laws are applied to it. So, buying commercial investment property for sale in the UK involves a number of factors.
Breaking down commercial property
You can buy commercial investment property for sale in the UK including shopping centres, grocery stores, offices, industrial estates, manufacturing shops and a number of other such spaces. The performance of commercial property, including sales prices, new building rates, and occupancy rates, are often used as a measure for business activity in a given region or economy.
Investing in commercial property vs. residential property
Buying commercial investment property for sale in the UK has traditionally been seen as a sound investment. This is because while the initial investment costs for the building as well as the costs associated with customisation for tenants are higher compared with residential real estate, returns on investment can be higher as well. Another benefit is the fact that some common issues that come with residential tenants aren’t there when renting the property out to businesses on clear leases.
Those engaged in buying commercial investment property for sale in the UK can also utilise the triple net lease, under which expenses such as real estate taxes, building insurance and maintenance are borne by the business leasing the space. This advantage is not available to residential real estate investors as the landlord is responsible for the obligations concerning the property.
In addition to favourable leasing terms, commercial property also tends to benefit from more straightforward pricing. A residential property investor has to look at a number of factors such as the emotional appeal of a property to prospective tenants. Whereas, in case of a commercial property, the investor can rely on the income statement that shows the value of current leases, which can then be compared against the lease rates of other commercial properties in the area.
How to buy commercial investment property for sale in the UK through REITS?
Real estate investment trusts (REITs) are an ideal option if you intend to invest in commercial investment property for sale in the UK but lack the capital to buy a whole building. REITs operate like mutual funds as they pool investments to buy assets and each share then represents the company’s underlying assets. Buying shares in a REIT gives you exposure to this sector without having to buy a building on your own.
How does commercial property investment work?
A property is bought and then let out in return for a rental income.
In case of commercial investment property for sale in the UK, that rent may be monthly, quarterly or any other timeframe that works for the landlord and the tenant.
This will be laid out in the lease agreement. These agreements are usually bespoke as opposed to the standard AST (Assured Shorthold Tenancy) agreements used with residential investments.
Leases are usually agreed over longer terms compared with ASTs, with lease lengths varying between 3 and 20 years.
Advantages
- The returns available when investing in commercial investment property for sale in the UK are higher than those on BTL property.
- The average yield for retail properties is 5.7%.
- Many leases are fully repairing and insuring, which means the tenant is fully liable for the repairs and insurance of the property. These leases remove a lot of the cost of maintaining the property and a lot of the effort involved.
- This can be a big advantage over buy to let properties as residential ASTs require repairs, maintenance and buildings insurance to be handled at the landlord’s expense.
The drawbacks
- The commercial property market is less liquid compared with the residential market. This often means that it can be harder to find a tenant when your property falls vacant. Which in turn translates to longer void periods for the landlord.
- However, business rates must still be paid during these void periods, with the responsibility falling on the landlord. If you have a mortgage on the property, it must also be paid, which can be a significant drain on cash flow.
- Moreover, price of commercial investment property for sale in the UK tends to be more volatile compared with the residential market. So, you may struggle to sell your property quickly without taking a hit on the price in times of volatility in the wider economy.
What to look for in a commercial investment property for sale UK?
Looking deeply at the market rather than investing blindly is the key.
For example, during the first pandemic-induced lockdown, the government asked many retail businesses to close. In cases like these, the likelihood of the rent falling into arrears increases as the tenant will have no income.
At the same time, essential retailers such as convenience stores saw their sales sharply increase. This made them a very popular choice for investors as they were seen as ‘pandemic proof’.
Although you can’t always predict the future, you should always assess and be prepared for the potential changes to markets in the future in order to be able to make an informed choice.
A surveyor, a solicitor and a good commercial mortgage broker can be valuable resources when considering a new investment.
How can you buy commercial investment property for sale in the UK?
These properties are funded using commercial mortgages, normally this will be an investment mortgage, which is like the commercial equivalent to a buy-to-let loan. Although they are similar in some ways, there are some key differences.
Mortgages for commercial property are usually offered at slightly higher interest rates, especially in the case of first-time commercial property owners.
Secondly, the LTVs are usually a little lower, with 75% being the absolute limit, but 65% are more common.
Finally, commercial mortgage lenders often expect loans to be taken on a capital repayment basis and while some lenders will accept interest only, this isn’t a given.
Why invest in commercial property?
Income potential: The best reason to invest in commercial property is the earning potential it offers. Commercial properties tend to have an annual return off the purchase price between 6% and 12%, depending on the area, which is a much higher compared with single family home properties which offer 1% to 4% annual returns.
Professional relationships: Small business owners generally take pride in their businesses and want to protect their livelihood. As opposed to this, owners of commercial properties are usually not individuals, but companies, and operate the property as a business. As such, the landlord and tenant have more of a business-to-business customer relationship, which helps keep interactions professional.
