6 things you need to know before investing in commercial property

Commercial property is an attractive choice for investors because ‘bricks and mortar’ potentially offers healthy capital growth, a regular monthly income, and greater security than investing in stocks and shares. One of the major advantages of commercial property investment in the UK is that leases are longer than those in the US and EU, and they are longer than leases on UK residential properties. The average lease length for an office is eight years which means a relatively stable income for an extended period of time. Recently the property market has started to lean towards commercial property investment as changes in tax laws have negatively impacted residential buy-to-let landlords.

What is classified as a commercial property?

Commercial property refers to all property and land that is used for business activities. Under the Town and Country Planning (Use Classes) Order 1987, UK commercial property is categorised under different classes. These classes include business, drinking establishments, financial and professional services, hotels, leisure, retail, storage and more. Commercial property also includes mixed use properties such as shops with flats above them.

6 things you need to consider before investing

  1. Are you looking for a long-term or short-term investment?

Before investing in a commercial property think about your timescale:

  • Are you happy to wait for the right opportunity by taking your time to watch the market for a property that will offer you the greatest return on your investment?
  • Do you already know exactly what you are looking for, the location, and how you will finance the investment?
  • Are you ready to invest straight away because you have already identified an opportunity?
  • Do you want an immediate return on your investment?

The timescale of the investment you are looking for will affect the type of property you invest in and how you will finance your investment.

  1. Retail, office or industrial?

Your personal experience and knowledge will impact the type of commercial property you choose. Perhaps you have refurbished a shop or an office before? Maybe you have experience in an area of business and so you understand the type of premises these businesses would like to rent? Perhaps you’ve noticed a gap in the market for a particular sort of property?

You might have spotted an opportunity such as a new office block development in an up-and-coming town with excellent transport links, or an industrial unit outside of town that’s affordable and handled by a management company.

It is worth watching out for regeneration projects involving new office or warehouse developments in cities and towns that are attracting large companies or are seen as a hot-spot for start-up businesses.

  1. Lease or purchase?

When you purchase a commercial property you own it outright, once you have paid off any loans. Taking out a lease means you rent the property from an owner either on a short-term or long-term basis. You might be able to take out a lease-to-own plan if you would like to purchase the property in future.

The benefits of owning a property are:

  • Your property is likely to increase in value over time so you will make a profit.
  • You can draw upon the equity as collateral if you need finance for your business.
  • You can rent the property out to tenants.
  • Tax benefits. There are tax benefits to owning commercial property.[1]
  • If you want to change the space, you have more control to do so than if you were renting.


The drawbacks of owning a commercial property are:

  • Purchase price. You will have to make a considerable down-payment at the beginning.
  • Mortgage repayments. Consider how you will cover repayments if the property becomes vacant.
  • Your cash will be tied up in property.
  • Maintenance costs. Whilst tenants are likely to be responsible for non-structural repairs (this would be set out in the lease), you will be responsible for any structural repairs needed.


The benefits of taking out a lease include:

  • Lower maintenance costs. You won’t be responsible for structural maintenance, but you are likely to be responsible for keeping the rest of the property in good condition.
  • Your cash isn’t tied up in property so you can access it for other business needs.
  • Tax breaks. You can deduct your entire lease payment from your tax bill.
  • If you want to relocate your business you have more flexibility to leave than if you owned the property. You will usually be able to agree the length of lease you require with the landlord or have a break clause in the lease.


The disadvantages of a lease are:

  • The cost of the rent and landlord’s service charge. Total rental payments might be more than mortgage repayments would have been.
  • A vacant property. You will be liable for rent for the full term of your lease agreement even if you no longer use the property. However, when you negotiate your lease you might be able to obtain permission from the landlord to sublet.
  • You will not benefit from any long-term capital growth as you would if you had purchased the property.


The decision about whether to purchase or lease a property will depend upon your experience, knowledge and particular situation. It is advisable to seek professional advice from a commercial lawyer when considering which option is best for you.

  1. Where to invest

You might invest in a commercial property in a specific area because it is near to where you live or work, or it is the hub of a type business that is familiar to you and so you can estimate the likely success of your investment.

If you are looking for a modest short-term investment you might choose an area with a lower cost of living where you can find commercial property at a reasonable price.

Whatever you decide, it is important to know that location is the key to a lucrative investment (see ‘Location’ below).

  1. Options for funding your investment

You do not need to be wealthy to invest in commercial property, and there are several different options available.

Direct investment

You buy an entire property or a share in a property.

Direct or ‘bricks-and-mortar’ fund

This type of fund makes commercial property accessible to small investors. Investment is through a collective investment scheme such as an Oeic, an investment trust or a unit trust. The trust invests in a portfolio of commercial properties which spreads the risk across different property types and locations.

Indirect property fund

You buy shares in a company that has a portfolio of commercial properties. This could be any company that is heavily involved in real estate such as a publicly traded homebuilder or a real estate investment trust (REIT).

REITs own and manage extensive portfolios of commercial property and are run by managers who buy, manage and sell the properties. The income generated from rental yield is distributed to shareholders as dividends.  As investment is through the stock market, property shares can go up or down in value.

  1. Seek legal advice

When making decisions regarding a commercial property investment there are many factors to weigh up as well as tax implications to consider. Commercial conveyancing is complex so it is advisable to seek legal advice from an experienced commercial lawyer early on.

An expert commercial lawyer will take the time to understand your business and tailor their service to suit your individual requirements.

Are there any risks involved?

When weighing up the risks you need to consider location, the lease covenant strength, and market performance.

Location

Location is the main factor to take into account when investing in a commercial property. Choosing a property in the right area will result in greater capital growth potential and higher yields, so it is important to research the area carefully.

The last few years have seen high profile businesses move to Manchester and Liverpool as well as other cities such as Bristol, Cambridge, Edinburgh and Leeds. Although interest in London is high, especially for technical firms seeking office space, it is better to look outside London for a good-sized commercial property at a reasonable price.[2]

Lease covenant strength

The strength of the lease (‘covenant strength’) means the quality of the commercial tenant, which has a huge impact on investment value.

A strong tenant is likely to honour their lease obligations and pay their rent on time. A FTSE 100 company is viewed as a very strong tenant.

If there is a decline in a tenant’s credit rating during the term of the lease this not only affects the investor’s income but also the future investment value of the property, so it is important to carry out research on a potential tenant before signing a lease agreement.

Market performance

In the last couple of years there have been fewer investments in retail properties, but experts think this could change. Businesses are realising that to survive on the high street they need to be able to compete with online shopping. Several major brands have adopted ‘experiential shopping’ which includes virtual reality, live music and more. It is thought that these initiatives will breathe new life into the retail property market. Some businesses are investing in retail properties anticipating a future rise in value. [3]

In recent years there has been a huge demand for industrial space but it is hard to predict whether restricted EU market access as a result of Brexit will have a negative impact. Despite uncertainty industrial premises continues to command good sale prices.[4]

According to a survey of property developers, investors and advisers by Fieldfisher, a European law firm, respondents identified hotels, industrial real estate and student residential properties as those likely yield the greatest investment opportunities in 2020.[5]

Talk to us

Insight Law advise investors and landlords on all aspects of commercial law. Our team of commercial property solicitors have an in-depth understanding of the UK property market with up-to-date knowledge on the impact of property trends and changes in legislation.

We have extensive experience in managing both single properties and large portfolios advising on the acquisition, leasing, management and sale of commercial properties. Our expertise and ongoing support can help you to boost the performance of your investments.

To find out how we can help with your commercial property investment call our legal experts on 02920 093600.

 

[1] Tax Café, The Benefits of Commercial Property, https://www.taxcafe.co.uk/resources/commpropertytax.html

[2] SevenCapital, Best Places to Invest in UK Property 2020, https://sevencapital.com/property-news/best-places-to-invest-in-uk-property-2020/

[3] We Buy Commercial, The prospects for the UK commercial property marketplace in 2020, https://www.webuycommercial.co.uk/contact-us/blog/the-prospects-for-the-uk-commercial-property-marketplace-in-2020.html

[4] We Buy Commercial, The prospects for the UK commercial property marketplace in 2020, https://www.webuycommercial.co.uk/contact-us/blog/the-prospects-for-the-uk-commercial-property-marketplace-in-2020.html

[5] Property Investor Today, Economic growth the top priority for UK real estate sector in 2020, https://www.propertyinvestortoday.co.uk/breaking-news/2019/12/economic-growth-the-top-priority-for-uk-real-estate-sector-in-2020

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