For years investors turned to commercial property as
they were able to purchase the property and more or
less forget about it because they had great tenants
with thriving businesses that were just happy to continue
trading from the premises. However, commercial property
fell out of favour due to the state of the global economy,
for many, investment in commercial property was not
financially viable due to limited access to funding,
poor market sentiment and a decline in rental value.
That
was then, now in 2010 the UK market has seen major improvement
in recent months with analysts reporting that UK Business
is back on its feet and rental growth is set to boom
once more with an increase in diverse technology firms
looking for suitable premises. Many residential investors
with only moderate debt are now looking at acquiring
commercial property in order to increase returns. Those
investors who have already cut through the general mysteries
of commercial property and are in the know are taking
full advantage of the current market and are certainly
reaping the rewards.
Gross
Yields are typically around 12% with the yield on purchase
prices of around 25% per annum
Lease
agreements usually put more responsibility on the leaseholder
/ tenant rather than the owner / freeholder and are
often “Full Repairing and Insuring” (FRI)
meaning the standards of the property are maintained
and if necessary the owner / freeholder can legally
force the leaseholder / tenant to complete any necessary
works to a satisfactory standard. Commercial Lease Agreements
are usually negotiated on longer terms than a typical
6-12 month residential AST
There
are lots of opportunities and benefits associated with
commercial property, but there are risks as well with
the recent downturn in the economy having a large impact
on tenant demand and commercial property prices. In
fact in most areas it is the quality of the occupant
that is the key factor for reliable rental payment and
trouble free income. So why do so many property investors
avoid commercial property?
This
may be down to a myriad of reasons, the most common
being:
*
Transaction sizes are much larger, so dealing with
large figures with multiple zero’s is never
a happy prospect if something goes wrong.
*
Volatile market conditions have seen up to a 50% reduction
in value of some commercial properties. Sometimes
even changing tenant can also affect the rental value,
although if you are considering buying at the present
time be happy that you are purchasing at the bottom
of the market and should see substantial growth as
the economy recovers.
*
Difficulty in assessing the financial stability of
business tenants and ability to pay the rent, especially
following the economic downturn. Look at a few factors
before making any decision and discuss them with your
trusted advisors such as your accountant and an experienced
solicitor who is used to dealing with commercial property
on a regular basis. Are the proposed tenants a new
business start up or do they have an established trading
history? Do their trading accounts show profit? Have
they been paying rent previously and for how long?
*
Age and location of property. Is there much point
in purchasing a crumbling building in a run down part
of town with no parking and limited access and trying
to offer it as suitable premises for a road haulage
company? Assess the suitability of the property and
take advice from an experienced business transfer
agent.
*
Lack of suitable commercial mortgage products on the
market. There are still lenders out there offering
commercial mortgages but the upper Loan To Value (LTV)
limit is typically only up to 70% with lenders requiring
around 140% interest cover from rent for the loan
interest and assurances that void periods will not
affect your ability to pay.
Commercial
property with accommodation attached such as a retail
shop with a 1 or 2 bed flat above it provides the opportunity
for an extra revenue stream either as a private residential
dwelling separate from the retail unit or as additional
commercial space that is easily converted into offices.
There
are many factors affecting investment in commercial
property, higher yields and larger returns offer the
prospect of a great investment opportunity and they
can be extremely lucrative but not without certain risks!
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