8 August 2019/ sale_commercial_property_guide

Top 7 steps to a profitable rental commercial property

Thinking of investing in commercial property? Check out the 7 essential things you need to consider!

See commercial property for sale in your area on Realla

Purpose, position and possibilities for future flexibility are just some of the factors to pay close attention to

Commercial real estate as an investment opportunity is an interesting proposition. However, before you embark on a property search, there are several things to think about – from the type of commercial building you want to invest in to whether you want to make the purchase solely as an investor, or as an owner-tenant. Other important considerations are location, condition of the property and flexibility for potential change of use.

Property experts suggest that the number of buy-to-let buyers purchasing commercial properties has tripled in the last few years – likely due to tax hikes and tougher mortgage rules squeezing landlords’ returns on residential properties. According to the British Property Federations Property Data Report 2017, since 2000, the value of the UK's commercial property stock has grown by an average of 3.0% each year. In 2016, the value of commercial property was £883 billion, representing 10% of the UK's net wealth and accounting for 13% of the value of all buildings in the UK.

So, while investing in commercial property is a growing trend that can undoubtedly offer good returns, it certainly doesn’t come without risk. Commercial property is cyclical, with annual changes in the value of the stock varying from +15% to -25% over the last 16 years. That’s why it pays to carefully evaluate all aspects of a potential property to ensure the space is worth your time and money and you’ll get a decent return on your investment.

Here are the seven essential things to pay close attention to:

 

1. Know the type and purpose of the property

Don’t just buy a property because it looks like a good deal and then try to figure out what to do with it afterwards. It makes much more sense to purchase a commercial property with a purpose. According to Phoenix & Partners, a London-based firm of chartered surveyors, the majority of commercial property types in the UK are: offices, retail (shops, supermarkets, retail warehouses), industrial (warehouses, factories), leisure (restaurants, pubs, gyms, hotels) and alternative properties (petrol stations, schools). Always purchase with a plan for what the building is going to be used for.

 

2. Decide if the location works

Location is one of the most important factors to consider when purchasing an investment property. For example, a shopfront business will fare better in a central location. If the operation is geared around remote transactions, out-of-town options are more practical. Think about how the commercial property will suit business needs, be it yours or those of your tenants. For example:

 

  • Type of property: retail, offices, leisure or industrial
  • Type of investment: freehold or leasehold
  • Transport: air, sea, rail and road links
  • Parking facilities and restrictions
  • Delivery facilities and restrictions
  • Congestion charges
  • Local amenities for staff
  • Proximity to pool of potential employees, including colleges and universities
  • Closeness to other businesses, suppliers or clients
  • Space configuration

 

3. Check the condition of the building

Always get a full structural survey. Not only will hiring a structural surveyor act as a precaution from poor property purchases, it will also prevent any defects from arising in the near future.

 

4. Define your investment budget

Set a budget and include hidden costs. Along with the mortgage – mortgage lenders tend to ask for a deposit of 20% of the value of a commercial property, sometimes more – there are several costs you’ll face at the outset including:

  • SDLT (Stamp Duty Land Tax) – commercial properties have lower SDLT rates, which range from 0% on the first £150,000, 2% on £150,001 to £250,000 and 5% on £250,000 plus
  • Construction and repair costs
  • Environmental compliance costs
  • Decorating and refurbishment
  • Buying and fitting out the space with furniture and equipment
  • Setting up facilities, including establishing IT
  • Professional fees

Then there are ongoing costs to factor in, such as:

  • Insurance
  • Maintenance and repairs
  • Services, including security and cleaning
  • Local authority charges, including waste collection
  • Retaining a commercial property estate agent to manage the building
  • Business rates, which are worked out by multiplying the rateable value of the commercial property – set by the Valuation Office Agency (VOA) ­– by the Uniform Business Rate (UBR)
  • Energy costs – the vendor will give you an Energy Performance Certificate (EPC) which will provide guidance on how energy efficient the commercial property is and what your energy bills are likely to be

 

5. Estimate projected growth

It's wise to choose a property where the demographics are stable or growing, and you should also check out which new businesses are moving into the area. If there are any anticipated changes to the road systems, it's smart to be aware of those as well, as property values may change when roads are diverted or modified.

Get familiar with the current and forecasted trends of the area around the property. Is it undergoing redevelopment? Not only can this provide a direct boost to the local economy –for example, when a local district becomes a food hub for a new university – it could also mean you’re eligible for relief allowances. These are offered by the UK government for rebuilding communities across the country and include:

  • Business Premises Renovation Allowance (BPRA): This is a 100% tax allowance for certain spending when you’re converting or renovating unused qualifying business premises in a disadvantaged area
  • Land Remediation Relief: This is a relief from corporation tax only. It provides a deduction of 100%, plus an additional deduction of 50%, for qualifying expenditure incurred by companies in cleaning up land acquired from a third party in a contaminated state

 

6. Research the current tenants

Investors often look for properties with tenants already in place. In the UK, commercial tenants are typically responsible for building maintenance and repairs, especially where a full repairing and insuring lease (FRI lease) is in place. This is in contrast to residential property investments where the responsibility for building maintenance and repairs usually falls to the landlord. When choosing commercial tenants, seek out those with a good reputation and strong, reliable finances to minimise the risk of them defaulting on their financial and other obligations during the lease term.

 

7. Decide if it’s flexible enough to face future challenges

Choose a property that provides you with flexibility in the event that a tenant defaults, the surrounding area changes, or something else doesn't go to plan. In these situations, you'll want to have the ability to change the property’s use or reconfigure the space to attract different tenants. Always remember that commercial properties are more sensitive to the economy, so the property you choose should be adaptable to shifting market trends. If you plan to redevelop the building or alter its intended use, you may require planning permission.

However, there are exceptions, where legislation allows some changes between use without full consent. For example, the Government introduced permitted developments rights in 2013 to allow offices to be converted into homes without the need for full planning permission – but always get advice from the local council and commercial estate agents.

Commercial real estate can be a great investment that can diversify your portfolio and provide you with additional income. When you select a space based on the above criteria, you'll feel confident that your property investment is worth every penny.

Looking for commercial property to buy? Check out Realla and find your next commercial property for sale!

About the Author: Tanner Milne

Tanner Milne is president of Menlo Group Commercial Real Estate, based in Arizona. He founded the company in 2008 with the objective of delivering value to clients through service, innovation, and solutions. During his career, Tanner has facilitated and negotiated projects and transactions with values of more than $500 million.