A common question in the finance sector is “How to invest in commercial property?” Although most investors are well aware of commercial real estate & the investment opportunities attached to it. Many still don’t know how to access commercial property investments.
In this article we will be looking into why commercial real estate is so popular, different ways you can get involved and finally what the routes to market are.
Key Considerations When Investing In Commercial Property
When investing in real estate they are several key considerations that need to be taken into account.
As with any investment product, due diligence is absolutely key. As part of this diligence you want to research the market, your research should include but not be limited to trends, vacancy rates, rental demand, comparable local properties and potential for growth in the area you’re interested in.
Location , Location, Location
Similar to residential property, location is very important to commercial real estate.
When considering the purchase of commercial property, you will need to account for various factors such as population density, how close the property is to transport links, what local amenities there are and how often commercial properties in the same area are performing.
Another big factor in your decision-making process should be the property type. There are so many options available when choosing commercial real estate, offices, industrial, retail spaces etc. Each of these property types will come with its own potential rewards and risks, when selecting a property type it’s advisable to select a premises that best meets your investment criteria and risk appetite.
The Advantages of Investing in Commercial Property
Investing in commercial properties can have huge upside potential for investors. The most common reasons investors opt for commercial properties are:
Potential for higher income from Rental
Commercial properties generally have a higher monthly rental amount than residential properties of the same size..
Another core factor for investors is diversification, commercial real estate carries a different set of risks and rewards to residential property. By diversifying into commercial, you spread and therefore limit risk.
Long term tenants
Generally speaking, commercial leases are issued for much longer than residential tenancies. By retaining tenants for longer periods, you reduce the amount of time and money spent on marketing your property.
Diverse Property Investment Strategies
When investing in commercial real estate there are several routes to market. The most common way to invest is, to physically purchase a commercial property, This property is then rented out, ordinarily on a lease. Depending on the property type, the lease could be anywhere between 1 and 99 years.
If you want to invest in commercial real estate but don’t have the will or the want to manage a property then there are still options available. You could purchase a property but relinquish control to a property management company.
Another option is to invest in a property fund that specifically targets commercial real estate.
The final option is buy-to-let property investments which we cover in more detail below:
Buy-to-Let Property Investments
Buy-to-let properties have lost some of their allure over the last few years. The reason for this is that as interest rates and inflation increase, the amount of profit available on a buy-to-let has reduced substantially.
Buy-to-let property is ordinarily purchased with a buy-to-let mortgage, the idea being that the owner of the mortgage sees profit not only from asset growth but also receives some passive income from rents.
Unfortunately as mentioned above with the cost of goods and services increasing and mortgage rates rising. The propensity for high returns on buy-to-let investments has since declined.
Investing in Commercial Property Funds / Bonds
Investing in property funds or bonds can be very complex, it’s of paramount importance that due diligence is plentiful. The best advice we can give is to always consult a professional bond specialist.
Although using a brokerage or advisory service may cost you a small % of the costs, in the long term it can save you a huge amount of time, money and heartache.
Companies such as New Capital Link carefully screen every company that they work with, which means that they will only select companies with a proven track record that spans 10 years or more , their assets outweigh their liability and are liquid in a growth sector. Utilising the advice of a specialist will mean that you can rest assured that you are making the best possible investment choice.
Commercial Property Trends
The Q1 2023 RICS UK Commercial Property Survey shows an encouraging improvement in market sentiment. Only 50% of respondents now believe the market is in a downturn phase, significantly down from the 83% reported in Q4 2022. A positive shift is seen, with 25% of respondents thinking the market has hit its floor, and 21% believe it has started to recover.
Tenant demand in Q1 had an aggregate net balance of -3%, representing an improvement from -20% in Q4 2022, indicating a potential low point in the cycle for this metric. However, occupier demand remains weak, with retail at -23% and offices at -6% in terms of net balance. On the other hand, the industrial sector experienced growth, with the net balance rising from +6% in Q4 to +16% in Q1, although still below the levels seen in Q2 2022.
Is commercial property a good investment in the UK?
Commercial property investment is widely considered one of the most stable and robust investment options in the world. But buying commercial property with the intention to let, is time-consuming and costly. Many investors will opt to invest in property funds or bonds to negate the time they have to spend managing the properties.
How to buy commercial properties in UK?
Before purchasing a commercial property in the UK, always seek the help of an experienced property specialist. Purchasing properties, for most people is the most expensive purchase they will make, so it’s vital you take the time to research the property’s performance history, stability and investment potential.
How do you make money from commercial property UK?
Making money from commercial properties can be done in a variety of ways, you could opt to buy and rent a property, apply for a buy-to-let mortgage or invest in a property fund.
What is a good return on a commercial property UK?
Returns on commercial property are dependant on a number of factors, these include but are not limited to size and location of the property, but also property type and requirement in the chosen location.
The average returns on commercial property in the UK differ between property types. Shopping centres produce a 7.5% yield, high street retail 6.75% and offices between 5-5.5%.
These figures are indicative and differ based on a variety of factors.
Property Bond UK
Property Bonds are popular with traditional physical property investors looking to diversify or simplify their income but are also still keen to protect their capital from volatility in the assets market.
If you are interested in investing in real estate and need a professional experienced advisor to help you navigate the finance sector. Then the experienced team at New Capital Link can help.