Mention property investment and your first thought might be the residential market. However, commercial property investment is growing in popularity among investors interested in substantial returns.
Buying residential property in London is still a good option – rental demand is high, you can decide to live in the property in future if you wish, and homes in key London locations will always be desirable.
However, at a time of uncertainty over Brexit, investing in residential property is not without risks. Many buy-to-let investors encountered problems when the 2008 recession struck. And although rental properties can be lucrative investments, changes to stamp duty and taxation have made them less attractive than they once were.
What is commercial property investment
Commercial property accounts for 13% of the value of all buildings across the UK and is worth almost £900bn, according to the British Property Federation.
Commercial property comprises a diverse range of property types including office space and retail establishments – from high street shops to large out-of-town complexes. It also refers to factories, industrial units and warehouses as well as leisure establishments, such as restaurants, pubs, hotels and gyms – and even car parking.
There are many ways to invest in commercial property assets the two primary approaches are direct or indirect investment. Direct investment involves the purchase of the physical “bricks and mortar”, while the indirect approach entails investing in stocks, shares and bonds of companies that specialise in property. In this guide, we will focus on the advantages and disadvantages of direct property investment.
Advantages of commercial property investment
1. It can be a solid investment
Commercial property has traditionally been seen as a sound investment. The initial cost of the building, and of refurbishing it ready for tenants, will probably be much higher than a residential buy-to-let property.
However, the overall returns are likely to be much higher too. And because you’ll be dealing with a company rather than individual tenants, many common issues associated with renting out residential property won’t apply.
While commercial property can involve a large, costly commitment, it is possible to invest through funds such as unit trusts, or investment trusts. These funds may own shares in property companies or own properties directly. They will pay you a return based on increasing value and rental income.
This type of property investment offers more security, relative to the returns, than the stock market or residential property, as income is guaranteed at a set level for a certain period of time.
2. Commercial properties come with long leases
The typical London office lease is between 10 and 15 years, or approximately eight years elsewhere in the UK. This is much longer than a buy-to-let landlord might expect for a residential property, which generally have leases of six months to a year.
Also, while residential leases have statutory protections in place for tenants, commercial leases are contractual. Commercial landlords have more protection under the law if the tenant fails to pay rent on time, or if they break any other contractual obligations.
3. Stamp duty may be cheaper
In most cases, the stamp duty on residential properties is higher than that on commercial properties, particularly where homes costing more than £1 million are concerned. If you are a buy-to-let landlord you will also pay an additional 3% levy on top of the normal charge.
4. You can refurbish and reap rewards
One way into the commercial property market is to refurbish old buildings in areas where demand for well-designed, quality office accommodation is high. This may mean looking at cities outside London. You’ll need to research the market carefully and set a realistic budget that ensures the investment works for you. But a good refurbishment could mean you’ll reap the benefits with a highly desirable property.
5. You might have fewer repair and maintenance demands
When you own a residential property, you are responsible for the repairs yourself. However, with commercial property the tenants may be responsible for maintenance under the terms of your lease. This can mean savings in time and money, making commercial property a good option if you’re searching for a stable investment with minimal input.
The downsides of investing in commercial property
1. Bigger initial investment
Direct investment in commercial property is not usually a viable option for the smaller private investor due to the high values associated with this type of property asset. You should also expect some large capital expenditures as repairs to a commercial building are likely to be costly.
2. Consider liquidity
Commercial property investment is much more illiquid than many other investments, meaning that they can sometimes take much longer to sell.
Many investment trusts and funds will charge exit-fees if an investor finds that the returns on an investment do not meet their expectations.
3. Factor in property management costs
While some of the maintenance may fall to the tenants under your lease agreement, you will need to be prepared to handle at least some of the maintenance issues yourself. You will need to hire tradespeople to undertake maintenance and repairs, often at short notice. If you want to be hands-off, you will need to hire a property management company. Ensure that you have factored in these costs when deciding whether commercial property is a good investment for you.
Understand the market
For anyone serious about investing in commercial property, it’s important to understand the market in the UK. To find out more about commercial property for sale or to rent in Wimbledon, contact us – we’d be happy to help.