There are a lot of benefits to buying commercial property as an asset class. Investing in commercial property, either buildings or land used for business activities, can generate a profit, either from capital gain or rental income. It can also be a good way to diversify risk in your portfolio as commercial property values aren’t generally as affected by what’s happening in the stock market.
Here we’ll list some different types of commercial investment property and the advantages of owning it, as well as look at how commercial property is valued, and what to expect with leases and selling.
Types of Commercial Property
Commercial property is commonly divided into the following asset classes (Class E being the most popular) :
- Office Buildings (Office building and services offices) – Class E
- Industrial (industrial, business parks, warehouses, self-storage, logistic & distribution centres) – Class E – B2
- Retail (shops and shopping centres) – Class E
- Leisure (restaurants, public houses, hotels, cafés and sports facilities) – Class E – C1
- Healthcare (medical centres, hospitals & care homes) – Class E – C3
- Residential blocks [student accommodation & PRS) – Class C2
- Land (to be developed) – Any of the above
What to Expect When Investing in Commercial Property
When buying a commercial investment property, as an investor, you can typically expect regular, predictable and stable income from tenants. You can increase your income with rent reviews every 5 years to reflect the market, increase occupancy levels to bring in more rent and later on put the commercial property up for sale and ask a higher price for when you bought it, netting you capital gains.
With some commercial properties you may need to pay VAT, so investors will need to factor in an additional 20% on top of the purchase price.
Commercial property is valued by its annual rental yield, i.e. the value of the rent you can expect to receive from your property in a year. Rental yield is calculated by dividing your net rental income by the value of the property. For example, if a property is worth £300,000 and you receive a net rental income of £15,000 your rental yield is:
- £15,000 / £300,000 = .05 or 5% per year
Other considerations taken into account when valuing a commercial property include:
- when the rent is paid
- how long the lease is for and
- the quality of the business paying the rent.
Commercial property leases tend to run for longer terms than residential leases. The minimum lease usually starts at 5 years and can run up to 25 years or more. But most leases, even long term ones, will include break clauses that let tenants and landlords terminate the lease before the lease term ends. For instance, a business’s needs may change requiring them to move to a different location. A landlord may want to change the planning use of the building for a tenant of better quality that pays a higher rental.
Under a (Full Repairing and Insuring) Lease, the most common lease agreement, the tenant takes care of repairs, building insurance and business rates. When vacating, tenants have to leave the building as they found it or pay the landlord costs for any modifications or damage. If the landlord can’t find another tenant straight away they are liable for business rates.
A commercial property can be put up for sale with a current tenant / tenants. This is good for potential investors as they can calculate expected income over a specific time frame, and feel confident about earning income immediately.
Commercial property can be a very lucrative asset to own and provides investors with a long term stable source of income, as well as the opportunity to achieve increased capital gains. If you’re looking to acquire a commercial investment property or you would like to list your commercial investment property for sale, give our expert commercial estate agents a call on 020 8800 4321.
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