Considerations When Investing In Commercial Property

Jul 29 2016

Darren Best

Despite commercial property remaining a game player for current and future investors, it hasn’t all been plain sailing over the years. In 2008, the commercial property plummeted with prices falling by 44 per cent almost overnight. However, since then, the market has returned to its former glory and has remained an attractive asset for home and international investors. In 2013, 2014 and 2015, investment returns were 10 percent plus; proving a worthwhile venture for many. Not to mention, the UK benefits, outweigh those of the US and Europe. Typical lease lengths in the UK is between 10 to 15 years, while the average lease length across all the UK is approximately eight years. Though lease terms are more flexible than residential property agreements, this structure has more security relative to the returns offered by shares, as the income is guaranteed at a basic level for a period of time. So before you jump the gun, here are some of the basic reasons you should be investing in commercial property.

Generate a healthy return

Commercial property income potential is a lot greater than that of residential properties. An investment can be far more beneficial and though it depends on the area and type of property you purchase, a general annual return of the purchase price can be anywhere between six and 12 percent. If you choose to opt for residential property as a form of investment of return, you can generate a return of one and four percent at its best.

Triple net leases

Triple net leases is a bonus for landlords and owners as unlike residential properties, where this type of lease isn’t available, this net lease exempts the owner from paying expenses on the property. You would only be expected to pay the mortgage and small businesses, on the whole do not sign these leases, as opposed to larger companies, to ensure they can maintain the look, feel and value of their brand. lease-terms-commercial-propery Photo credit: thodonal88/Shutterstock 

Negotiate flexible lease terms

For some reason or another, residential leases have a lot more consumer protection laws in place when compared to commercial property. For that reason, many look to invest in commercial property as the investment is headache-free. A commercial license is particularly attractive to new firms, or those who are just starting out in the business world and will therefore need a flexible lease, for when they expand and outgrow their current premises. A commercial lease provides greater flexibility to those not wanting an exclusive possession.

If you can’t buy outright, there’s another option

Commercial properties generally costs millions of pounds to purchase or to build, which can generate a huge rental income. However, for many, the reality of buying outright isn’t possible, so most invest through funds, which are like unit trusts, Oeics or investment trusts. These funds either directly own the property and they will pay you returns based on their growth in value and rental income, or buy shares in property related companies. You usually only need around £500 to invest in one of these funds, or £50 a month for regular savings.

How do investment funds work?

Investment funds are split into two types – a traditional bricks and mortar fund will directly invest into a property and therefore structured as an open-ended fund or a closed-ended investment trust. This fund will be responsible for the rent collection, maintenance and will have the added benefit of a regular rental income which rises according to inflation. However, due to the nature of commercial property difficult to buy or sell, these funds are difficult to come upon. Investors can also look to invest through a Reit – real estate investment fund such as the Land Securities or British Land, which has a portfolio of properties it owns. One downside to this form of fund is that it is a far less diverse way to invest as it’s just one company. There is also an indirect commercial property fund which is in the form of unit trusts and Oeics – in which you buy shares in companies that invest in property. These shares are listed on the Stock Exchange and are therefore traded daily. The benefit of this is that you can move in and out of the fund freely. Your return of investment will be through shares, which is through share price appreciation and dividend income. stock-exchange-london Photo credit: adison pangchai/Shutterstock  Feature image credit: Fabryczka Fotografii/Shutterstock 

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