Investing in commercial property

Investing in commercial property

14:32 PM, 26th November 2010, About 14 years ago

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Commercial property investment is much like sinking cash in to buy to let homes to rent – as a landlord you research and select a property, finance the investment and manage the tenant who pays your costs out of the rent.

Some investors would argue that now is a good time to put money in to commercial property as the market is in a trough but generally rises on par with the rest of the economy.

Recent specialist commercial property surveys indicate that the market has a glut of unoccupied offices in London and the major cities.

The main factor that stops residential investors buying commercial property is the cost of entry in to the market sector – houses come cheap in most areas compared with commercial premises.

If you have less than £500,000, the likelihood is all you can buy is a small lock-up or semi-commercial building – that’s a shop or office with a flat on top.

Often, these premises are in secondary shopping areas blighted by retail parks and supermarkets and have a high turnover of tenants looking for cheap rents.

Many investors work round the cost of entry problem by clubbing together in to a partnership or company and pooling their investments to buy a better property.

Commercial finance tends to soak up more cash due to deposits, fees, and costs than buying a house to let. The loan-to-value rarely exceeds 75% and may fall to 60% depending on the type of property.

Just as a residential mortgage, funding is hard to find, a new investor seeking commercial finance may find tracking the Holy Grail easier than a commercial loan from a bank.

Sourcing finance from a commercial broker with contacts in specialist lenders and merchant banks often solves the funding problem.

Yields depend on property types and locations. A good property in a prime area with a lucrative tenant on a 10 or 15-year self-repairing lease might return 8% or more a year.

A good commercial solicitor is essential for drafting a correctly worded lease that removes a lot of the cost and risk from the landlord to the tenant.

Other ways of indirectly putting money in commercial property include bonds, pensions, and other institutional investments.

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