The residential property sector has always dominated the UK property market. However, while many people have historically strived realise their dreams of home ownership, increasing numbers of investors are inching into the realm of commercial property.
Investing in commercial property is rising at a rapid rate. The commercial property market currently accounts for a sizeable minority of the overall UK market, with a total value that’s in excess of £680 billion. If you’re asking “what is commercial property anyway?”, it’s simply defined as the slice of the UK property market that consists of premises like industrial warehouses and factories, shops and retail establishments, restaurants, pubs, bars and hotels. It’s also where business investors are busy scouring for a good deal when it comes to expanding their own enterprises, or newcomers to commercial property are on the hunt for a first-time base of operations.
Key Considerations In Investing In Commercial Property
Buyers in need of a commercial property to accommodate urgent business requirements often have to make immediate decisions and accept compromises. However, for investors or small businesses with more flexibility, it pays to step back and consider the market first.
Right time to Invest In Commercial Property?
Ask yourself whether or not it’s the right time to be buying commercial property by asking a few key questions. Firstly assess the overall general value of commercial property in the specific corner of the market you’re looking at. You want to know you’re not paying over the odds for both the asking price of the property itself, as well as any commercial mortgage associated with it.
Take note of the supply of commercial property market in the area you’re focusing on as well. Think about the type of properties readily available in the target area, the overall number of available properties and, the overall condition and quality of these properties.
Availability of commercial mortgages
Beyond the status of the property market itself, you need to determine how readily available commercial property mortgages are when conducting your preliminary research. There’s more to consider than the health of the commercial mortgage lending market. Look at the situation as a whole across the UK before honing in on your target location. Then, you’ll want to ascertain how accessible mortgages are for certain types of commercial properties. Some lenders may be more open and flexible in this respect, but others can be a lot more restrictive in offering mortgage deals to borrowers.
Looking to become a landlord?
A healthy proportion of the investor population is made up of commercial property landlords whose requirements tend to be much the same as general business needs, with a few key differences. Availability factors come into play again here. Consider the supply and demand of rental opportunities for businesses and commercial enterprises in your chosen region.
The easiest way to do this is to check local listings for business rental properties. You’ll not only get a clear overview of the variety of properties available for businesses to rent, you’ll also quickly capture the average rental values for such properties. If you’re looking for guidance on how to value commercial properties, this is a very important factor to include in your assessments. Seeing what others are charging for business rents lets you ascertain the immediate rental yields you are likely to command, even if future trends in the commercial rental market can’t be predicted.
If you notice the majority of commercial properties being rented in a particular area command a rental value lower than what you were expecting, stop to think about next steps. Are you tightly bound to basing a business in this area? You can always look elsewhere for places where business rents bring in a higher income for landlords, but bear in mind this will undoubtedly mean a higher initial investment and significant mortgage implications for landlords.
Alternatively, you might want to focus on establishing your rented property as a prestige listing in your original target location. There’s an inherent risk to consider when dealing with commercial property on the higher rungs of the market, but it has its benefits. A high-quality property with premium facilities will undoubtedly invite attention from tenants who can afford the going rental rate. These sort of tenants provide landlords, with plenty in the way of financial security. It’s just a case of securing such a tenant in the first place.
Know your competition
You’ll also want to get an idea of how many rival investors might be operating within the same business sector and geographical region as you are. It’s not great to find out you may have competition from other investors, but it does mean you can avoid dragging your heels on decisions to ensure you don’t pass on ideal properties and lose out to a fellow buyer. At the same time, don’t let a market busy with buyers push you into making any rash decisions. While you don’t want to lose out on a property that’s a great fit for your requirements you also don’t want to attach yourself to a high-risk commercial mortgage on an unsuitable property because you’re unsure whether you’ll find something better.
Finding a property that’s the perfect fit
Your individual requirements will heavily influence your commercial property search. We’ve talked a little bit about what’s important for landlords to remember when looking to rent to other commercial entities. However, for businesses looking for a new base of operations, there’s a whole host of other considerations in the mix. The commercial property market is broadly split into retail, industrial, leisure and office/administrative and each of these have their own location-specific perks and drawbacks.
Buyers put plenty of focus on location when purchasing residential properties for a multitude of reasons. For commercial properties, location is even more crucial. City and town centres are often seen as a prime location for businesses, but this isn’t true for all commercial entities. Retail businesses might benefit from a central location, with high footfall and convenient transport links. The same applies to some properties that fall under the leisure sector, such as pubs, bars and restaurants.
However, there are limitations of a prime central location. Parking restrictions and congestion charges will limit the amount of custom coming into city centres solely for shopping and leisure experiences, so footfall becomes an invaluable necessity. The same transport and access restrictions can also throttle logistics, with retail enterprises potentially facing difficulties when it comes to deliveries. Consider the proximity of a premises you’re interested into nearby businesses or suppliers you may partner with too. If you plan on developing an extensive list of clients and expect frequent meetings and visits, you’ll also want a property that’s easily accessible to them if.
Road transportation links aren’t enough, so you’ll want to ensure there are adequate public transport links, particularly rail, located within a reasonable distance. For businesses with an international portfolio of clients, having a premise located within reasonable proximity of an airport is also enviable. If you employ staff you may also want to identify properties that are accessible and in reasonable proximity to local amenities to ensure optimum productivity.
Freehold vs leasehold commercial properties
In the UK property is ordinarily held as either freehold or leasehold. Leasehold properties tend to make up the majority of commercial properties in any given area, offering businesses looking to rent a premises enticing options. However, for those looking for long-term alternatives and a place to establish their business, buying a freehold property might be worth considering.
Advantages of freehold
Freehold commercial properties offer many perks to the buyer, with the chief incentive being that a business can remain fixed at its a base for as long as required, without the worry of leases expiring. They are also most likely going to attribute value as time goes on, making them a more lucrative asset. Even if a business doesn’t perform particularly well, this appreciation in property value can soften the blow, come the end of trading. As you own the property, you’ll also be able to expand the premises to accommodate growing workforces and business operations, should you receive approved planning permission. It’s also possible to sub-let areas of the premises to other businesses to bring in an additional income. This is subject to restrictions as laid out in your mortgage agreement.
Freehold commercial properties can command significant asking prices, which can seriously limit the amount a business can use to spend on establishing and developing an enterprise in its formative months and years. Deposits are also substantial, with some lenders requiring as much as 30% of the overall value of a property in order to approve okay a commercial mortgage agreement.
While commercial property can increase in value, it can also diminish. When you come to sell and move on, you could face a real shortfall in expected earnings from the sale. If you’re still in business and are relying on the sale of your existing property to continue business operations and establish a new base, this is worth considering
Commercial property classes
As you search for commercial properties to purchase, you’ll notice that there are many different classes assigned to various premises. This is important to consider when browsing for suitable properties, with legislation as laid out in the Town and Country Planning Order serving as your guide. There are four distinct parent classes, assigned an A, B, C or D prefix. Each of these include several sub-classes for narrowing down an intended use of a property. These classes ascertain how each property is currently occupied.
If you wish to alter the use of a purchased property once you’re in ownership of it, you’ll need to obtain planning permission in order to do so. The same applies if you wish to carry out any substantial alterations. There’s some leeway here. Some permits have been introduced to allow office properties to be converted into residential accommodation without requiring full and exhaustive planning permission.
This is something that should reassure commercial property investors who might be concerned about return on investment should they need to sell their business premises down the line. Bear in mind such legislation is currently only temporary and a likely reaction to the national housing shortage. It may not be applicable in the future. As such, always check planning permission eligibility and legislation with a local council if development is on your mind.
Key commercial property costs
When it comes to purchasing a commercial property, there are substantial costs to consider.
The deposit is usually asked for when it comes to exchanging contracts. The remainder of the purchase price is then paid by the buyer once a deal is completed.
You must consider the cost of consultancy from the likes of estate agents, solicitors and lenders. These aren’t cheap, but they’re a necessity for commercial property purchase if you don’t want to get stuck with an investment that’s going nowhere and only losing you money.
Stamp Duty is another consideration for buyers in the UK, Wales and Northern Ireland. It is imposed on any commercial property purchase with a value that exceeds £150,000. Similar costs can be expected in Scotland, with the Land and Buildings Transaction Tax to consider. Depending on the type of commercial property you’re purchasing, you may also find the deal subject to VAT. Finally, you’ve all the fees tied into the arrangement of a commercial mortgage to consider if you’re looking to fund the purchase via that lending route.
Smaller fees and costs
Smaller fees and costs Once these large lumps of cash have been taken into account, there are further fees and costs for smaller services to work into your calculations. If you’re moving existing equipment and furniture to your new premises from your old one you’ll have transportation costs to cover. If you’ve nothing to bring to your new base or are setting up for the first time, these outlying costs are even more extensive.
How much furniture will you need to accommodate employees? What equipment does your workforce require? You’ll also want to work in the outgoing costs of things like setting up an IT infrastructure. If your commercial property isn’t in the best condition, there may also because to cover refurbishment costs before its fit for business.
Once these costs have been accounted for, you have a further raft of expenses to think about. These include essentials like insurance, not to mention local authority charges and business rates. If you’ve acquired your property with a commercial mortgage, make sure you remember to include your lender repayments as an outgoing cost in your projections. Other costs to keep in mind include maintenance and repair work for any issues as they arise, not to mention ongoing cleaning services for your premises.
One of the biggest financial implications for buyers of commercial property is business rates. These taxes are imposed on all buildings that are deemed non-domestic and can be quite considerable. The way these rates are worked out involves taking the rateable value of the commercial property itself and multiplying it by the Uniform Business Rate (UBR). The rateable value of the property is set by the Valuation Office Agency.
These rates are revised regularly once every five years. If business rates are causing you serious concern and you feel that finances are hinged upon a small variation, bear these revisions in mind. Five years isn’t that long at all for a business and rates may escalate above the rate of any increasing business activity and associated income. If you’re looking to cut costs wherever possible, it’s worth noting that business rates have some exceptions in place, but not many. Small businesses are potentially entitled to some relief, while businesses in rural areas can also benefit from discounted rates in certain circumstances.
No matter what your area of business, energy costs will form a considerable portion of your regular outgoings. Rocketing energy costs seem avoidable for everyone at the moment, businesses included, but there are still ways to minimise the dent they can put in your profit performance. When purchasing a commercial property, the vendor should provide an Energy Performance Certificate. This certificate, otherwise known as an EPC, should underline how efficient the premises is.
What you need to consider here is how this relates to energy bill costs, allowing you to broadly predict how much you’ll be setting aside to keep the lights and other essentials running. At this point, you may decide to abandon certain luxuries when carrying out a refurbishment or opt for alternative solutions that are cheaper to run and more efficient. Properties are rated A through to G, with A being the most efficient and G representing the most inefficient. You should have an EPC issued once every 10 years, so there’s a chance to have the property reassessed and certificated for energy efficiency ahead of any potential sale down the line.
How to invest in commercial property with financing
A commercial mortgage is perhaps the easiest borrowing method for those looking to finance the purchase of a property for business needs. In more recent years, the lending line-up has expanded to include alternatives to high street banks, ensuring the market will likely have a solution that’s better suited to your needs than it was only a few years ago. You’ll want to have a few things in place before applying for a business loan or commercial mortgage, however. Get your business plan in order as a priority, before compiling extensive bank statements and accounting references associated with your business activity. Consulting a third party specialist in commercial mortgages is advised to ensure the smoothest sailing during this part of the process.
Putting in an offer and sealing the deal
When you’ve narrowed down your search and selected a desirable property, it’s time to make an offer Make a written offer to the seller themselves or, in most cases, the estate agent representing the vendor. If you’re refused an offer, you can always negotiate. If your offer is accepted, it’s important to request that the property be removed from any online listings. Even though you’ve been accepted, other interested buyers may provide the vendor with a better buyer alternative. It’s always possible another buyer can come in to steal the deal.
The closed nature of the commercial property market means it’s always possible another buyer can make a more substantial offer to the vendor that dwarves yours. However, it’s not just outbidding with a better offer that can scupper your deal. A rival buyer might offer a lower offer than you and still entice a vendor away from you if they are preferable in other ways.
They may, for example, boast more reassuring financial credentials and, be able to complete the deal and financial transfer more immediately. To ensure you keep rivals at bay, it’s advisable to request an exclusive deal with the vendor. A lock-out agreement, as it's otherwise known, gives you peace of mind that you can carry out due diligence and complete the deal, without the vendor striking up another correspondence with other buyers.
It’s important to note such an agreement will have to include a timescale. If the vendor agrees and one of these deals is put in place, make sure you yourself adhere to it and complete all necessary steps and actions within the time period. Next, heads of terms are created to outline the agreement between you and the vendor. It will include essential information like financing information and timescales for completion of the deal.
Special requests can be added with the help of a solicitor or agent. During this last stage of the deal, surveys are carried out to give the property the final green light. If you’re stuck waiting anxiously during this period, consider putting planning permission research into motion to see about any restrictions you might face with future expansion. Only when both parties are entirely in agreement and satisfied with the contract, the property is okayed as fit for purpose and financing has been raised will the deal be considered complete.
Get in touch for commercial property investment advice
We hope our guide to commercial property investment has been of help to you. If you’re still in search of answers to questions you might have about this thriving UK property market, get in touch with the team at Prideview Group today. Our expert team have the insights and contacts you need to ensure your commercial property ambitions are realised. Whether you’re unsure as to how to value commercial property and need the professional insights of a team that has been in the business for more than 25 years or simply need help strengthening your search, we’re the ones to help. To start the conversation, get in touch. We look forward to helping you achieve your property dreams..