Tue 06 Nov 2018
Commercial property rental is not the most natural first choice for portfolio investment, but the yields can be just a good with arguably less effort.
There are three categories of commercial property:
- Retail Property – supermarkets, retail warehouses, high street shops and shopping centres;
- Office Property – purpose-built facilities for businesses, complete with associated and essential services such as high-speed internet;
- Industrial Property – warehouses, garaging, storage facilities and industrial units.
For the average investor, finding the funds to buy an entire supermarket might be a bit of a stretch. With any buy to let property you will typically require a higher loan to value ratio (around 30 – 40% in many cases); therefore, initial outlay for a deposit is higher than a standard residential mortgage.
There are ways that you can invest in commercial property on a larger scale without needing to shell out mega bucks by yourself. First, you must evaluate whether or not investing in commercial property could be a good thing.
What are the Benefits of Investing in Commercial Property in the UK?
Compared to other European countries and the US, the UK benefits from a longer lease structure. On average, the UK has a lease length of eight years across the entire country with the exception of London where it’s even longer at between 10 – 15 years.
Residential leases can be as short as six months but more typically one year plus. Comparably, this is much longer and therefore potentially more secure. Essentially, your rental income on a commercial property investment is guaranteed at a set level for an extended period of time.
How Can I Invest in Commercial Property?
You may well be able to fund the cost of a standalone office unit, shop or small industrial unit. If so, there is no real difference in the purchase and subsequent rental process. You will be responsible for allocated maintenance as per the lease agreement and are solely responsible for the monthly mortgage repayments.
A wise option might be to pass on the property management aspect to a letting agent in order for the investment to be as hassle-free as possible.
An alternative way to invest in commercial property is through investment funds or trusts. With a lump sum investment of as little as £500 you can buy in to a fund that does one of two things:
- Directly owns properties;
- Buys shares in property-related companies.
Where an investment company owns the property, your return is based on their rental income and growth in value, much the same as residential property purchase. If shares have been bought, your return is based on the growth in the value of the shares and the payment of dividends.
Investing more directly in the “bricks and mortar” route, your income can be considered more secure. This is due to a lower risk of default than residential properties and standard upwards-only rent reviews. Additionally, where an investment fund is responsible for the purchase of a commercial property, you do not have the hassle of property management.
Investment via shares attracts the same risks and rewards as shares in any other business type. Whilst it’s not all “Wolf of Wall Street”, there is natural associated volatility when investing in the stock market. However, you have flexibility of easy liquidity (check the small print on your investment property fund clauses) rather than needing to wait for a sale of property to realise further revenue.
To sum Up:
The purchase of commercial property could be a good diversification move in your property portfolio. There is slightly less inherent risk resulting from national financial crashes that significantly affected residential property prices. Property on the whole is considered a good investment and continuing with direct bricks and mortar purchases means these assets are kept separate from the moving and shaking of the stock market.