Increase Investment Returns with Commercial Property

Property investors are always looking for ways to increase their yield and return on investment.

As the residential property investment market has become more competitive, yields have suffered and the opportunity to pick up a bargain has reduced.

As such, some savvy investors are now turning towards commercial property to diversify their portfolio and drive up yields.

Why invest in commercial property?

What makes commercial property an attractive investment?

Commercial property investment is becoming more popular as investors look to move away from the overcrowded residential buy to let market in search of stronger returns.

The UK commercial property market is strong, and unlike vanilla buy to let investment, can still offer excellent, and in many cases, predictable yields.

How can I invest in commercial property?

Most commercial property investment is direct investment, with a property investor purchasing a property and letting it out.

Other forms of direct investment include planning gain plays, commercial to residential conversion and refurbish to sell approaches.

Indirect investment is also possible, whereby an investor invests in to a commercial property backed investment fund, although management fees are likely to impact your returns.

How does commercial property investment work?

Buying a commercial property

When buying a commercial property, most people fund the transaction using a commercial investment mortgage – a type of commercial mortgage.

Often, commercial investment property is purchased with a tenant already in place. As the terms of the lease are already set out, it’s a good idea to get your solicitor to review the lease before committing to the purchase.

For first time commercial property investors, the market can seem a little alien, so surrounding yourself with experienced professionals can make the process far simpler.

Understanding leases

The lease is the legal document that lays out the terms of the agreement between the landlord and tenant. Commercial leases in the UK are agreed for an average term of 8 years, so it’s important that you get them right.

Leases can be fully repairing and insuring, meaning the tenant is liable for all repairs to the property, and for insuring the property during the term of the lease. Other leases may leave the liability for repairs and insurance at the door of the landlords, which can lead to additional expenses, which will impact your profits.

Other things to look out for in commercial leases include break clauses (a set period in which the agreement can be cancelled) and rent reviews. Rent reviews can be upward only, or may give scope for the rent to go up or down. Of course, upward only rent reviews give you additional certainty around your future income.

Managing the property

In theory, fully repairing and insuring commercial property should be simpler to manage than residential property. That said, things do crop up and it may be a good idea to work through an experienced commercial letting agent – even if this is just initially.

Letting a vacant commercial property is more specialist than letting residential property, and as such working with an agent could be a good idea.

Is commercial property a good investment?

Understanding commercial property yields

Commercial property yields are higher than residential, with residential property currently offering a yield of 3.53% per annum.

Commercial property returns are usually broken down by sector, with shopping centres producing a 7.5% yield, high street retail 6.75% an offices between 5-5.5%.

To calculate your yield, divide your annual rental income by the property value and then multiply it by 100.

Why is residential buy to let investment less attractive?

Residential buy to let investment yields are lower than those available through commercial property, especially vanilla buy to let.

While HMO investment, property development and property flipping can offer strong returns, they all require greater amounts of management.

Commercial property offers high returns, and little management, as many leases pass on insurance and repairs of wear and tear to the tenant.

Stamp duty surcharge

A stamp duty surcharge of five percentage points has been introduced for all second home and residential buy to let investments. Commercial and semi-commercial property is exempt, which means that there is an immediate cost saving when investing in commercial or semi-commercial property rather than a traditional residential buy to let purchase.

Funding a new commercial property investment

Commercial mortgages

When directly investing in commercial property, you can look to take out a commercial mortgage.

Commercial mortgages, specifically a commercial investment mortgage, can usually only be taken out once the property is let.

If you’re buying a vacant property, you may need to consider short term finance, such as bridging finance.

Bridging loans

Bridging loans can be used to purchase a property that is currently vacant, allowing you to finance a purchase while you look for a tenant. In this situation, a commercial bridging loan would usually be the solution.