There are many reasons for buying a commercial investment property for sale UK, including capital growth and the potential rental yields the buy-to-let investor can achieve over the course of the tenancy. Market demand for properties in the UK will remain high as the population increases and the demand for housing rises. Commercial property can be a good investment opportunity as they typically offer higher financial returns compared with residential properties, though they also involve more risks.
What is a commercial property?
Commercial properties may refer to:
- Retail spaces
- Office spaces
- Industrial buildings
- Apartment buildings
- “Mixed use” buildings, which may be a mix of retail, office, and apartments.
Positive reasons to invest in commercial property
Here are some of the pros of buying a commercial investment property for sale UK compared with residential property:
Potential income: The best reason to invest in commercial property as opposed to residential rentals is the earning potential. Commercial properties generally have an annual return of the purchase price between 6% and 12%, depending on the area, which is much higher than those for single family home properties (1% to 4% at best).
Public eye: Retail tenants have a vested interest in maintaining their store and storefront because if they don’t, it will have an impact on their business. As a result, the interests of commercial tenants and property owners are aligned, which helps the owner maintain and improve the quality of the property, and ultimately, the value of their investment.
Limited hours of operation: Businesses usually close at night. In other words, you work when they work. Except for emergency calls at night for break-ins or fire alarms, you should be able to rest at night without having to worry about receiving an awkward midnight call because a tenant wants repairs or has lost a key. For commercial properties, it is also more likely you will have an alarm monitoring service so that if anything does happen at odd hours, your alarm company will notify the relevant authorities.
Rational price evaluations: Because you can request the owner’s income statement, it’s often easier to evaluate the prices of commercial investment property for sale in the UK as you can use this to determine what the price should be. If the seller is using an experienced broker, the asking price should be set at a price where an investor can earn the cap rate prevailing in the area for the commercial property type they are looking at which could be retail, office, industrial, etc. On the contrary, residential properties are often subject to more emotional pricing.
Triple net leases: Triple net leases vary, but the general concept is that as the property owner, you do not have to pay any expenses on the property, unlike the case of residential real estate. The lessee handles all property expenses directly, including real estate taxes, so the only expense you’ll have to pay is your mortgage. Big companies typically sign these types of leases, as they want to maintain a look and feel in keeping with their brand. So they manage those costs, and, as an investor, you get to have one of the lowest maintenance income producers for your investment.
The downside of investing in commercial investment property for sale UK
While there are many positive reasons for commercial investments over residential, there are also negative issues to consider:
Time commitment: If you own a commercial retail building with five tenants, or even just a few, you will have more to manage than you do with a residential investment. You can’t stay out of the scene and maximise the return on your investment. With commercial, you are likely dealing with multiple leases, annual CAM adjustments (Common Area Maintenance costs that tenants are responsible for), more maintenance issues, and public safety concerns. In a nutshell, you have more to manage; and just as your tenants have to worry about the public eye, you do as well.
Requirement of professional assistance: You should have a license if you are going to handle the maintenance issues at a commercial property yourself. The likelihood is you will not be prepared to handle maintenance issues yourself and you will need to hire someone to help with emergencies and repairs. While this added cost isn’t ideal, you’ll need to add it to your expenses in order to properly care for the property. Remember to factor in property management expenses when evaluating the price to pay for a commercial investment property for sale in the UK. Property management companies can charge between 5-10% of rent revenues for their services, which include lease administration. You need to evaluate ahead of time if you want to manage leasing and the relationships on your own, or if you want to outsource those responsibilities.
Bigger initial investment: Acquiring a commercial investment property typically requires more capital upfront than acquiring a residential rental in the same area, so it’s often more difficult to get your foot in the door. Once you’ve acquired a commercial investment property for sale in the UK, you can expect some large capital expenditures to follow. Your property might be running along for a few months when a large, unexpected bill arrives to address roofing repairs or a new furnace. With more customers, there are more facilities to maintain and therefore more costs. What you hope is that the gains in revenue outweigh the gains in costs, to support purchasing a commercial property over a residential one.
More risks: Properties intended for commercial use have more public visitors and therefore have more people on the property each day that may do something to damage your property. Cars can hit patrons in parking lots, people can slip on ice during the winter, and vandals can spray paint the sides of the building. Though these incidents may seem a remote possibility, and you may ignore them, incidents like these can occur anywhere, but chances of experiencing something like these events go up when investing in commercial investment property for sale UK. If you’re risk averse, you may want to look more closely at putting your money in residential properties.