Buying a commercial property requires a lot of research and due diligence to make intelligent and profitable investment decisions. Residential property investments tend to be front of mind when the phrase ‘property investment’ is mentioned. However, commercial property in the UK is becoming increasingly popular, with some investors seeing substantial returns. Commercial property investment accounts for 13% of the value of all buildings across the UK.
In this guide, we are going to walk you through all the key things you need to consider when making a commercial property investment in the UK. We will look at exactly what a commercial property is, the purchasing process and the benefits and drawbacks of commercial property investment in the UK. So read on to find out everything you need to know about investing in commercial property in the UK.
What is commercial property?
Commercial property is a term used to identify a range of property types. The vast majority of this sector can be split as follows:
- Office space, which can be used to run your business or to let out to other companies.
- Retail, such as shops, supermarkets, warehouses or shopping centres.
- Industrial, warehouses and factories.
- Hospitality, restaurants, pubs, leisure centres and gyms.
- Alternative retail, fuel stations and educational establishments.
Commercial property can be defined as a building where business is carried out. The designation of a property as commercial property is significant because it affects how it is financed, how taxes are applied, and what laws apply when referring to it.
How to purchase a commercial property in the UK?
When you purchase a commercial property in the UK, there are several legal and practical considerations you need to take into account. For example, the legal rights and ownership of a building can affect the value significantly. In addition, commercial property can usually be divided into two subcategories, leasehold and freehold. We will take a look at these in more detail now.
What is a freehold commercial property?
The owner of a freehold commercial property has complete and exclusive ownership of the commercial property. As your asset, you have the freedom to sell or move businesses into or out of the property at your discretion. This gives business owners and investors long-term security. The property is more likely to appreciate in value over time, and subject to planning permission approval, you can extend or alter the property to meet your commercial requirements. With the right mortgage, you can also sublet parts of your property to other businesses to generate additional income.
On the flip side, when you own a freehold property, you become responsible for any property repairs and maintenance of the buildings. Additionally, if you cannot obtain planning permission as your business grows for any reason and needs more space, you will need to sell up or find another suitable tenant. With any property purchase, there is also the possibility the value could go down, and even if it doesn’t, you will be liable for any capital gains tax on the sale if you make a profit.
What is a leasehold commercial property?
A leasehold property means you will not own the commercial building outright, but you do have exclusive ownership of the premises for a fixed period. A leasehold usually applies when the commercial property is part of a larger complex where the freehold is held by another party who will be responsible for the building’s management and maintenance. However, as the leaseholder, you may need to contribute towards these costs. A leaseholder has the right to conduct business in the property within the terms of the lease for the length of the lease. Less capital is usually required upfront for a leasehold property, however, the opportunities to alter the building or subset part of the property become more restricted under a leasehold because you may not have permission from the freeholders.
During this article, we will talk about buying a freehold property in the UK for the most part.
What to consider when buying a commercial property in the UK?
Buying a commercial property at the right time can be a difficult decision. Ideally, you should aim to buy when market prices are not at their highest, so it’s best to check out local and national trends to see where things are currently sitting. If you are unsure where to start, we would recommend obtaining advice from a commercial agent who will be able to give you a good idea of the current market and let you know what is currently available in your preferred area.
The value of a commercial property is likely to depend on the following factors:
- The current value of commercial premises.
- Supply of commercial property.
- Availability of commercial mortgage products.
- The appetite of other investors.
- Current tenant demand and rental forecasts, where you plan to let your commercial property.
It seems obvious, but you’ll need to consider how the prospective commercial property will meet your business needs or that of any tenants. For example:
- What are transport links like? Be it road, rail, bus routes or air travel.
- Does it have parking facilities or any parking restrictions?
- What delivery facilities does it have?
- Will congestion charges be applicable?
- Are there any local amenities for staff?
- Proximity to a pool of prospective employees?
- How close is it to other businesses, competitors and clients?
- What facilities, equipment, and furniture is already in place?
- Does the space configuration meet your needs?
- What impression does the building give potential clients or employees/tenants you hope to attract?
Commercial property is divided into classes in the UK under the Town and Country Planning (Uses Classes) Order 1987. This legislation determines how a commercial property should be occupied. Before going ahead with any purchase, you should make sure that the building’s class is in line with any business that you intend to carry out in the building. The types are as follows:
- A1 shops
- A2 financial and professional services
- A3 restaurants and cafés
- A4 drinking establishments
- A5 takeaways
- B1 business
- B2 industrial
- B8 storage or distribution
- C1 hotels
- C2 residential institutions
- C2A secure residential institutions
- C3 homes
- C4 houses in multiple occupations
- D1 non-residential institutions
- D2 entertainment and leisure.
If you intend to change the use of your commercial property, you may be required to obtain planning permission to do so. However, under some circumstances, you may be able to change the use of a property without the need for planning permission under permitted development rights. One example of this is where an investor intends to change the use of an office block into flats.
What costs do I need to factor in when buying a commercial property?
Like any other type of property purchase, you will need a deposit which is payable when contracts are exchanged on the property. The balance is then paid when the sale completes, whether by cash payment, commercial mortgage or another funding source.
Apart from the cost of the property, there are some other expenses you’ll need to budget for when buying a commercial property. These include stamp duty, VAT, mortgage arrangement fees, and legal fees. You’ll also need to budget for any redecorating and refurbishment required and buying equipment to fit out the space to get your commercial property in a useable state for either your or your tenant’s businesses.
On top of these, you’ll also need to consider the ongoing costs that will apply. For example, insurance, repairs and maintenance, mortgage repayments, utility bills, and local authority charges for services such as wastewater collections.
How to secure a business loan to buy commercial property
You may require a commercial mortgage to finance the commercial property purchase. Commercial mortgage lenders have stringent lending criteria that any prospective buyer must meet before approving a mortgage application. They will need to see your current financial position, business plan, and commercial mortgage repayment proposal before deciding if you are a good risk.
In the current climate where buyers need to act quickly to secure the right property, obtaining a commercial mortgage can take too long and leave the buyer in a position where they might lose out on their dream premises. In cases where time is of the essence, or where the commercial property needs some renovation work before a mortgage company will lend against it, a bridging loan could be an option to finance a commercial property in the short term whilst the buyer obtains longer-term finance. If you are interested in commercial bridging loans to secure a commercial property purchase, you can find out more here.
Once you have your finances in order, you can then put in an offer for a commercial property. Commercial offers need to be submitted in writing to the agent handling the property sale.
After you have negotiated a purchase, we recommend carrying out a local authority search. This will flag up anything that may impact the running of your commercial property and the wider area. An investigation could provide details of things like other planning applications in the area, building regulations, transportation issues or developments, or even contaminated land. These are all things you will want to be aware of before fully committing to a purchase.
Once you have everything in order, it’s time to appoint a solicitor to handle your purchase, draft up your offer and contracts, and carry out searches. This period of time should also be used to obtain any planning consent as required for your intended business use.
What are the benefits of investing in commercial property?
Okay, so we have determined that investing in commercial property is a complex process, but what are the benefits if you decide to go ahead? Well, to start with, commercial property is considered a solid investment. Of course, the initial costs are higher than they would be for a residential investment, but the returns are likely to be much higher than they would be for residential properties.
Commercial properties also have lower stamp duties compared to residential properties. They also attract longer leases should you intend to bring in tenants. A commercial lease tends to run for 10 – 15 years compared to a 6-12 month term of a residential property lease.
Commercial properties are also less demanding when it comes to maintenance. Under many leases, a tenant is responsible for maintenance which is the opposite of residential leases where a landlord still has a responsibility to maintain the property. This will save both time and money for any commercial landlord.
What are the drawbacks?
There is no hiding the fact that commercial property is a significant investment, so the initial outlay will be high. Capital expenditures are typically high as investors refurbish commercial properties to make them suitable for the business purpose intended. There are also increased risks to owning commercial properties. Businesses have a higher number of visitors compared to the average residential property which raises the likelihood of someone getting hurt or damaging your property. Whilst incidents can happen anywhere, they are more likely to occur in a commercial setting vs. a residential one. It’s something to consider for the risk-averse investor!
There is a lot to consider when choosing and investing in a commercial property. Ensuring the property you intend to buy is suitable for both you and any prospective employees or tenants is instrumental to its success and how much revenue you can make from leasing the building. That being said, commercial property is a sound investment that can yield considerable returns when done right. If you are interested in finding out more about commercial bridging loans, this article may help answer some of your other questions.