Investing In Commercial Property? 10 Things You Need To Know
If you are thinking about investing in commercial property, then you might already have some experience or knowledge, or an idea of what sort of property you will be looking for, what return you want to achieve and the ideal locations.
Alternatively, you might not know how to go about making an investment in commercial property, what to expect or how to finance it.
Whichever type of investor you are, below are 10 points which our experienced commercial property team recommend you consider.
- Level of investment and return
Commercial property investment can start from a similar level to residential property, to a much larger scale which can bring higher risk. Determine what you can afford (including any ongoing costs for the lifetime of the investment), and what sort of commercial property you can find at that level of investment.
Think about what you can get for your money. Even in the same location, the same level of investment might get you much more warehouse than shopping centre (or shop), whilst an office space in a small town might be a fraction of the cost of one in, or near, a large city. Your projected return will be affected by location, infrastructure, socio-economic factors and the available workforce.
Commercial property often has longer leases than residential, guaranteeing income for longer. The downside is that you need to factor in the level of risk for periods when the property is vacant. How long can you weather this storm? Whilst a residential lease (commonly known as an AST) might be for six months or a year, a commercial property lease agreement may be for 10-15 years.
- Long or short term investment
Think about whether you want a short or long term investment. One of the common commercial property pitfalls is thinking too much about the short term, and not the long term.
Maybe you have had some experience of investing, and know what to expect, or maybe you’re thinking that investing in commercial property is a good way to ‘get rich quick’. When planning your investment, consider whether there will be seasonal fluctuations and be informed about planning for the region. If proposals are in place for regeneration, what effects could this have on the site you are considering? Search for planning decisions in your area.
Do you have a timescale in mind when it comes to investing in commercial property?
- Are you looking for an immediate return on investment?
- Are you prepared to wait for the right opportunity to come along?
- Do you want to invest right away to take advantage of a local opportunity?
- Do you know exactly what you want, where and how you’re going to finance it?
- Are you cautiously studying the market to see what is generating an acceptable return on investment?
If you have some experience in investing or commercial property, then perhaps you will already know what to do next, and be ready to invest when you spot the perfect opportunity.
However, if you don’t know what to expect, what type of property to invest in, or how best to finance your investment, then you will not want to rush into anything. Speak to an expert in commercial property; their advice might be more affordable than you think, and seeking this advice is likely to maximise the return on your investment.
- Retail, office or industrial?
How do you decide which type of property investment is right for you?
- Perhaps you want to invest in a retail environment in a popular commuter town with excellent transport links, within a 1 hour drive from where you live as this is where you want to locate your business.
- Do you have knowledge in a particular area of business and understand the type of office space these businesses would rent (or know there is a gap in the market for quality office space to fulfil their requirements)?
- You are considering investing in a small industrial unit within an industrial park at the other side of the country as it is more affordable, and is handled by a management company.
Other alternatives include investing in a new office or warehouse development in an upcoming city that is currently attracting a lot of big-name companies, retaining a high proportion of its graduates or known for its start-up culture. If you are willing to wait to invest in commercial property, then a keeping watchful eye on regeneration projects may help you to time it right: ahead of the crowd, and while you can secure a more lucrative deal.
- Why this type of commercial property?
You might have good reasons for investing in a certain type of commercial property. Will you choose based on your head or your heart, or your interests?
Maybe you have:
- refurbished many shops
- been involved in choosing industrial premises for your company
- spotted an upcoming area full of office block developments that you want to invest in
- worked in or with companies in the commercial property sector
- worked with commercial landlords or helped prepare leases.
If you are completely new to commercial property, it is recommended that you seek professional guidance from a wide range of sources – including people who have already invested in commercial property. In particular, make sure you get legal advice. A solicitor can help secure the best deal and advise you on the fine print of the lease – this area in particular can be full of pitfalls for experienced and novice investors alike.
- Lease or purchase?
Depending on your situation, knowledge and experience, decide whether you want to lease or purchase the commercial property you will be investing in.
There are pros and cons to both options so establish what is important to you, and get professional advice to determine which option is right for you.
When you have found a property you are interested in, this is the time to seek advice from an experienced commercial property lawyer who can help you understand the lease, the clauses and the other technicalities.
- Where do you want to invest?
- You might already know the exact location or area you will invest in.
- Perhaps you will choose a commercial property near to where you live or work, because you are familiar with it, know the type of businesses there and can estimate the level of success.
- You might choose somewhere unfamiliar because it has the potential to yield a greater return on investment over a 10 year period.
- Maybe you will choose somewhere more ‘traditional’ or ‘safe’ with a history of business growth, or somewhere with a reputation for technology, manufacturing, retail or services.
- Or, you might be looking for somewhere that offers a modest short-term return, which might be an area with a lower cost of living, and so cheaper commercial property.
- How will you invest?
Whilst you are thinking about the type, returns and location of the commercial property you are going to invest in, you will also need to think about how you are going to invest. There are two common methods:
- Direct or ‘bricks and mortar’ fund: whereby the fund owns the property.
You will own part of the commercial property, and so depending on the type of property, if there are tenants paying rent then you will receive some of that rent. During vacant times, you may not receive anything.
- Indirect commercial property fund: whereby you buy shares in a company that invests in property.
These types of funds often have different types of properties in their portfolios, and so the risk is spread more widely. This means there is more chance of you getting a return on your investment, even if one type of property or location is not performing as expected.
The less common method is that you own the whole property. This option might be possible, depending on your level of investment and financial position, for a smaller office development, row of shops, or warehouse.
Each option has pros and cons, so you will need to learn more to help you determine which one best meets your needs and financial situation, including taking into account tax and property investment.
- Your experience
Also, think about what experience you have in investing whilst you are learning about commercial property. Perhaps you have already had a successful experience with buy-to-let property, and are looking for something more adventurous with a greater risk and reward. Perhaps you are a seasoned investor with a portfolio of stocks and shares looking to diversify. Or, maybe this will be your first investment, and you are unsure what to expect.
- Speak to a specialist with the right experience
If you need advice at any stage when looking to invest in commercial property, speak to an expert with experience of the complexities of commercial property. A professional who only has a general knowledge of property will not help you negotiate the potential pitfalls, which is where you can lose money.
Whatever level of experience you have, whether looking for your first commercial property or adding to your portfolio, consider the first ‘w’ before anything else: why do you want to invest? The answer to this question will help determine the ‘what, where and how’ you go about making the investment.
Also, whatever level of risk you are taking, early in the process seek professional advice from a commercial property expert; there are many differences between investing in commercial property compared to residential property. Taking this advice early can bring rewards for you later.
If you are looking for help with the acquisition or disposal of commercial property, advice on commercial leasing or are involved in a property dispute, our experienced commercial property team can help you.
The team at Hillyer McKeown has a wealth of experience when it comes to helping people investing in commercial property. We offer comprehensive advice from securing the right deal when buying or selling, to leases, finances and pension arrangements.
If you have already secured your commercial property, we can help you with landlord and tenant advice, leases, and recovering debts.
Contact Caroline, one of our commercial property lawyers.
We offer an initial free, no obligation conversation about your situation and if we can help you we can then advise you about the process, cost and how long it might take. Contact our team by email or phone.