Commercial Property Investment

When talking about 'Buy to Let', most of us think of investing in residential property. Jan Merriott advocates commercial property as a viable option.

Commercial Property Investment

Over the last few years we have seen an attack on residential property investment from the government which in our opinion has only acerbated the problem of housing shortage. When will the government learn that discouraging buy-to-let investors simply reduces the letting supply and increases capital values making it even more difficult for people to buy their first home and increasingly expensive to rent as well!

In these conditions, residential investment activity increasingly becomes the domain of the large investor while the new small-scale investor is discouraged by:

  • Penal stamp duty levels on buy-to-let investment
  • Abolition of mortgage interest as a deductible allowance
  • Dwindling net yields as property values increase disproportionately to rental returns
  • Ever tightening finance terms
  • A maze of compliance to work through   

With other assaults on buy-to-let investors weakening the landlord’s position it is increasingly a wonder that landlords try to manage their own property.  It now requires an expert manager as there are well over pieces of legislation to be aware of in letting residential property in order to avoid the pitfalls that are forever creeping up on the unwary investor.

As a result, we are increasingly seeing investors looking at the benefits of Direct Commercial property investing, and it features much less on the government’s agenda in terms of regulation. Advantages of commercial property investment are:

  • For tax efficient pension planning (SIPPS and Real Estate Investment Trusts). These options are not available to the small-scale residential investor
  • Yields are generally far better and leases longer
  • Management is less intensive- tenants tend to fix their own leaking taps!
  • There is less competition to buy in this sector
  • Stamp Duty is much less to purchase commercial property (e.g. nil up to £150,000).
  • Commercial property investment requires effort and understanding at the start but opens up a whole new world of investment opportunity.

However, like any investment it is not risk free and higher yields by implication suggest it is riskier. This is due largely to:

  • Lots sizes can be quite large (many buyers will “gear up” on their pension funds to achieve a larger overall purchase than the cash they have)
  • Sales can take longer to conduct although auction is always an option
  • Extra costs can be incurred on vacant, e.g. business rates on empty property
  • Economic redundancy occurs in some property, e.g. where demand and customer behaviour changes
  • Commercial property follows a slightly different cycle to residential, e.g. the retail investment sector is experiencing a downturn based on retail weakness currently
  • You cannot finance off low equity. Generally, as a rule you need at least a 35% deposit.

However, for a long-term investor who knows his onions commercial property will be part of their investment portfolio to provide diversification of risk.

Although the main sub-sectors are principally confined to retail, industrial and offices there is a range of specialist investment options for those with specialist knowledge, e.g. ground rent investors, development and land speculators, property traders etc.

For those looking for more passive ways of investing in commercial property there are other ways of investing such as buying shares in property companies, or in property investment trusts including Real Estate Investment Trusts set up to provide maximum pension benefits.

For further information about commercial property investment please contact Jan Merriott on 01305 217992, or meet our commercial team of experts here

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