The pros and cons of investing in commercial property
It is common knowledge that investing in residential properties in key London locations has always been a sound idea; however, as economic uncertainty looms in a post-Brexit Britain, this kind of investment now comes with added risks.
With this in mind alongside potential changes in stamp duty and taxation, residential properties are looking less attractive to buy-to-let investors. A suitable alternative and different branch on the same tree comes in the form of investing in commercial property, which the British Property Federation announced recently was worth £900bn and accounted for 13% of the value of all UK buildings.
There is a huge range of properties that fall into the categories of commercial, including office spaces, large complexes, industrial units, factories and warehouses. This also includes leisure establishments such as pubs, hotels, gyms and restaurants. With commercial property encompassing such a broad range of establishments, there are lots of opportunities for investors to get involved in that cover a variety of different costs.
There are two primary approaches towards investing in commercial properties, which are direct and indirect. Direct deals with investment in the actual property, whereas indirect refers more to investment in stocks, shares and bonds of companies that specifically specialise in property. Below is a breakdown of the potential risks and benefits of directly investing in commercial properties.
Benefits of investment
It’s a solid investment
Commercial property has always been a solid investment. Where the initial costs that come with its refurbishment to make it suitable for tenants will likely be much higher than those of residential properties, the returns of commercial property investment are also likely to be much higher.
If you are unable to afford the initial costs of preparing commercial property, another avenue of investment can be through funds such as unit trusts or investment trusts, which may own shares in property companies or properties directly. You will receive a return from these investments based on its increasing value and rental income. This investment method comes with more security as an income is guaranteed at a set level for a specific period of time.
Cheaper stamp duty
The stamp duty on residential property tends to be higher than that of commercial property. This is especially the case with homes that cost more than £1 million, meaning this will apply commonly to London properties, the average price of which now exceeds £500,000.
Longer leases
The leases taken out on commercial properties tend to be much longer than those of residential properties, typically averaging 10 to 15 years as oppose to six-months. It should also be noted that these leases are contractual, meaning landlords have more protection in law should tenants fail to pay rent or if they breach their contract in any other way.
Fewer maintenance demands
As oppose to residential properties where owners are responsible for repairs, with commercial properties, tenants are normally responsible for maintenance under the lease’s terms. As a result, landlords will save time and money, making investing in commercial property stable with minor input.
Risks of investment
Initially expensive
Direct investment is not a viable option for smaller investors because of how expensive it is to purchase and refurbish commercial properties. There will consequently be large capital expenditures as the initial repairs to the property will be costly.
Liquidity
Once you look to eventually sell your commercial property, because of the fact they are much more illiquid than other investments, this can be a much more elongated process.
Property management costs
Whilst some maintenance costs could be paid by tenants, the maintenance costs that you will be responsible for could be costly, this will include hiring tradespeople to carry out maintenance and repairs. You may want to consider using a property management company to alleviate the responsibility of maintenance, allowing you to take a more hands off approach.
Conclusion
With some potential uncertainty surrounding buying residential properties to rent out, commercial property could be a much more solid alternative that promises higher returns and more stability. Of course, there are pros and cons with going down this route. Pros include longer leases, less stamp duty and fewer maintenance demands, with cons being the illiquid nature of commercial properties, the cost of property management and the initial cost of investment.
If you are considering investing in commercial property but would like more information before doing so, you should contact an expert to discuss the best way forward.
Cengizhan Cerit is a Turkish/British businessman. He has a long-standing and successful career in both residential and commercial property maintenance, property investment and entrepreneurship.
He leads two property management firms, SISI Property Ltd and Meden Ltd that he operates out of Ashford and London. With his strong interest in culture and business sectors, he continues to successfully develop both of these property firms.
Cengizhan Cerit is constantly updating his website with regular content covering all aspects of property investment, management and entrepreneurship.
