If you are new to the world of commercial property investment, we are sure you have got lots of questions. We take pride in helping our clients navigate the world of property investment and, to help get you started, have put together a guide to this exciting business venture. If you have any questions, we are always here to help.
What is commercial property investment?
Commercial property investment is when you buy a property which is used for business purposes with the goal of renting it out/profiting through capital appreciation. Commercial property investment opportunities would include buildings used for offices, shops, warehouses, licensed leisure etc. (not residential properties).
This type of investment is different to residential property investment, as you typically let to a business rather than an individual. There is usually a higher initial investment and longer lease, and greater potential profit.
Why invest in commercial property?
Commercial real estate investing is relatively expensive and involves significant initial administration, but there are compelling reasons to take the plunge:
- Potential for high yields
- Longer lease terms than with residential property
- Profit through capital growth
- Predictable, stable income
- Hedge against inflation
Types of commercial property investments
There are different ways of investing in commercial property:
| Type of investment | How it works | Pros | Cons |
| Direct ownership | You buy the property and are responsible for leasing it out, managing and maintaining it. | You retain full control; potential for high returns; relatively straightforward to understand and manage.
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High initial cost; you are responsible for all admin; all your risk is in one asset. |
| Indirect ownership | Invest in a property-related financial instrument (rather than owning the building). E.g. REITs (Real Estate Investment Trusts) which are publicly traded companies who own and manage commercial properties; property funds which pool investments; or ETFs/mutual funds focusing on real estate companies. | Smaller initial cost; potential ability to invest in multiple properties/different sectors; you are not responsible for managing the property or tenants.
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You have less control and may face additional management fees.
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| Buying for your own business | You buy a property to use as your own shop, warehouse, etc. | Long-term saving on rent; no difficulties finding/managing a tenant; potential for capital appreciation and tax benefits. | Through an initial large capital outlay, you may ‘tie up’ money that could be used elsewhere; you are responsible for all maintenance. |
Key considerations before investing
Like with any investment, it is important to think carefully before committing. Consider the following:
- Location of the property
- Condition and maintenance costs
- Demand for that type of property – how easy will it be to find a tenant?
- Lease length
- Tenant quality
- Legal and tax implications
- Funding/mortgage options
Understanding yields and returns
The whole point of commercial property investment is to make a profit. As you consider your options, weigh up the risk vs reward: is the likelihood of the property being profitable worth the risk of investment?
It is a very good idea to look at the net yield and gross yield of a potential investment. Net yield is your total annual income (rent) before any expenses are deducted. It is a useful rough figure for comparing properties you are considering for investment. Gross yield is a more accurate idea of your potential earnings. It is your total annual income minus expenses such as maintenance and insurance.
Important factors that must be considered before committing to a commercial property investment due to the potential impact upon your return are lease terms (e.g. lease lengths and rent reviews) and voids (when the property is empty, e.g. you are searching for a tenant).
Due diligence and professional advice
When considering property investment opportunities, you should ask professionals to help inform your decisions. Property Surveyors / Valuers, solicitors and commercial agents will all be invaluable as you proceed:
Property surveyors
- Manage building projects and monitor developments
- Survey a property for structural and hidden issues – extremely important before committing to a purchase
- Provide an accurate valuation for insurance
- Planned preventative maintenance services
- Conduct rent reviews
Solicitors
- Help complete the legal side of purchasing/letting property
- Assist with any disputes between the owner and the tenant
Estate agents/commercial agents
- Provide market appraisals for the sale/rent of property – important when calculating your potential income
- Help you find and purchase a property
- Help you market your property and find a tenant/buyer
- Commercial agents take a sales commission, usually 1-3% of a sale price, or a letting fee of 7-15% of the first year’s rent. There may also be other fees including marketing expenses and management fees.
When it comes to selling or leasing your property, it is likely you will be asked to provide several documents, including:
- Risk assessment,s including fire, health and safety
- Asbestos surveys
- Electrical Test Certificates
- Energy Performance Certificate
- Gas Test Certificate
- Air conditioning certificate
- Legionella certificate
- Environmental reports/surveys
- Planning permissions/Approved Use
- Recent utilities bills and business rates bill
- Details of any disputes
- Copies of insurance policies
- Details of capital allowances claimed
- VAT election notice
- Copies of any leases
- Last three rent demands and payment confirmation
Risks and how to mitigate them
Any investment comes with risks, and commercial property investment has specific risks you should be aware of:
- Tenant default or vacancy – if a tenant fails to pay or your property is left empty, you will lose out on income you may have banked on. Choosing and vetting your tenant carefully, taking a security deposit and getting insurance are all steps you can take to mitigate these risks. Even once you have found a tenant, letting a commercial property can take a few weeks to several months to arrange.
- Market fluctuations – nobody can 100% predict what the market will do. Your property may decrease in value, and you may get less income via rent/sale than expected. This is of particular relevance, given recent changes to legislation which have banned ‘upward only’ rent reviews.
- Liquidity issues – selling the property may take longer than hoped, and you should expect it to take at least several months (or more, depending on demand). During this time, you will be liable for all costs such as loan servicing, business rates and insurance.
- Regulatory or planning changes – you may face hurdles if changes are made beyond your control.
How to invest in commercial property UK – top tips
If you are new to commercial property investment, it can feel overwhelming. While there are risks, the rewards can be substantial and we hope our introductory guide has helped you understand how the world of commercial real estate investing works.
Our final top tips:
- If you are new to commercial property investment, start with a lower-risk asset, e.g. fully let or with long leases.
- Diversify across sectors or regions to spread the risk.
- Regularly review performance to check the property is as profitable as possible.
- Market effectively – a commercial agent is your best friend here.
- Do not get lost in jargon. This glossary of terms is perfect for decoding documents and understanding what you are reading/agreeing to.
Get in touch
At Trinity Rose, we offer a full suite of commercial property services. Our team of experienced RICS Chartered Surveyors and our dedicated Commercial Agency team offer expert advice throughout Hampshire and Surrey and are here to help.
If you are planning a commercial property investment or would like to talk about any of our services, please get in touch. We will be happy to answer all your questions.