If you’re interested in property investment then investing in a residential property may seem to be the obvious, indeed only, choice. However, it’s also worth looking at investing in commercial property such as offices, shops or industrial units.
As we approach the end of the year the latest RICS UK Commercial Property Market Survey shows that demand for commercial property is growing across all of the UK, from both occupiers and investors, while supply is falling. It suggests that there is likely to be upward pressure on both capital values and rental values of commercial property as a result.
Here I’ll look at why commercial property can be a good opportunity – but also consider some pitfalls to bear in mind:
* Investment prices can be low. New commercial investors are frequently surprised by how much commercial property they can buy for their money, especially when compared to residential property. A small commercial property investment can be had for less than an average semi-detached house.
* Returns can be higher. Assuming you’re buying to let then you should generally expect a much higher yield than with residential. Rather than 4-6% or so on you might expect 10%, 20% or even more with commercial.
* It’s a much more hands-off investment. Unlike with residential, tenants of commercial property are usually responsible for all repairs and much maintenance under the terms of the lease. You won’t have to deal with most maintenance, nor face unexpected maintenance bills which eat into your rent.
* It’s a longer term proposition. Once you have a tenant in place chances are they will have a fixed term lease of, perhaps, minimum five years, ten years or even longer. Unlike with a residential property you won’t need to find a new tenant every year or six months.
Apart from rarely needing to find a new tenant this also means you will receive a regular income over the five or ten year period.
* Your commercial property might have future development potential, offering scope to turn a considerable capital gain. For example, redeveloping commercial sites with residential property can prove extremely lucrative. (Generally a residential site will never be suitable for anything other than residential.)
* New and upcoming landlord and tenant legislation which is affecting residential landlords does not generally affect commercial landlords. Commercial property could be a simpler ownership proposition for the future.
* There may be tax advantages to investing in commercial property which can be exploited. Take expert advice on this, as well as on any possible tax disadvantages.
And here are some of the potential pitfalls of investing in commercial property:
* Good commercial property investments with potential are not always easy to source. There is much less choice than with residential.
* Commercial property is harder to finance. Fewer lenders will lend for commercial property and their terms are less competitive.
Possible solution. Take expert advice on the most cost effective way to finance a commercial investment.
* It may be harder to find a good tenant. Individual properties tend to be suitable for a limited range of uses, and that will limit the number of tenants who will be interested. This can be a particular problem if a tenant vacates a property part way through a lease.
Quality of tenant may even affect a commercial property’s finance-ability and capital value.
Possible solution. Take expert advice on the market for a property you are considering buying in the area you are considering buying, including on rental prospects and value.
* Prospects for capital appreciation can be more uncertain. Unlike with residential property where historically prices have always followed an uptrend over time this can’t be taken for granted here. Historically, commercial property tends to rise in value only gradually in good times, although it can drop off quickly in bad times.
As a result, commercial property tends to be much more of an investment for income than for capital appreciation.
As with any property investment, Property Insider strongly recommends that you do your own research and take professional advice before investing in any commercial property.