Investing in commercial property (shops, warehouses, offices etc) as an additional source of income can be profitable. It offers the potential of healthy capital growth, a regular monthly income, and greater security than stocks and shares or other interesting investments methods of investing.
With a chronic undersupply and rising demand for property in the UK, long-term forecasts for rental prices are extremely positive, with prime commercial property rents increasing by 1.9% in Q2 2022.
Another plus point is that commercial property in the UK typically has a longer lease structure than residential property, which may only last for six months to a year. In contrast, an average commercial lease in the UK is around eight years – rising to 10-15 years for a London office.
This structure offers more security, with income guaranteed at a set level for an extended period of time.
However, while investing in commercial property can bring greater financial gains than personal property, this form of investment also has increased risk, may require more capital up front and the process may be more complex than residential property investments. In addition, it is worth considering that working from home has become more common post pandemic and office space may no longer be as valuable as it was for some businesses.
There are different ways to invest in commercial property, along with a variety of mortgage options and a range of ways to earn money – and you may benefit from mortgage advicetalking from a trusted financial adviser.to a trusted financial adviser about these.
What are the different ways of investing in commercial property
- Direct commercial property investment
A direct investment means buying all, or part of, a property and may require the investor to acquire a buy-to-let mortgage.
If this is the case, you may need a higher up-front deposit – often 20-40% of the value of the commercial property – and you can expect to pay a higher interest rate that for a personal property mortgage because of increased risk to the lender.
You should also build into your financial planning additional buy-to-let or rental fees such as buildings insurance, ground rent and charges, maintenance costs and letting agency fees.
- Direct commercial property funds
Direct commercial property funds is a way to invest in a portfolio of commercial property through a collective investment scheme, such as a unit trust, OEIC or investment trust. This method may be more feasible for investors without the funds to invest in a commercial property outright.
The funds either own properties directly, and you receive returns based on growth in value and rental income, or buy shares in property-related companies and pay based on growth in the value of the shares and dividends.
It is important to note that commercial property funds may have a clause that enables fund managers to stop payments to investors who want to exit the funds if there are “exceptional circumstances.” This was used by some fund managers during the pandemic. It may be worth talking to your financial adviser about investment planning to discuss any possible caveats.about possible caveats before investing.
- Indirect property funds
These are collective commercial property investment schemes that enable investment in the shares of property companies listed on the stock market – usually in the form of ISAs, unit trusts and OEICs.
These schemes shouldn’t have the liquidity problems of direct commercial property funds, so you can move in and out of the fund freely – but you will have the risk of stock market volatility. Returns are based on share-price appreciation and dividend income.
How to earn money on a direct commercial property investment
If you have decided to take the direct approach to investing in commercial property, there are a few different ways to earn money:
- Buy the property and lease it to tenants
- Change/update the property and then lease it or sell it on
- Refurbish it in the short term without making changes
The buy-to-let/ leasing method is the usual approach, enabling the investor to receive a regular income from tenants.
Updating the property can be a good mid-term solution that may increase the value of the property and enable higher rents to be applied. But a large deposit may be required, and investors will also need sufficient funds to pay any mortgage without the initial income of tenants. Bridging finance may be used, but it is worth speaking to a trusted financial adviser about borrowing options for your commercial property investment.
If you are aware of other potential buyers looking for properties like yours (which is perhaps underpriced), flipping it – buying and then selling it immediately – could bring a quick profit. But don’t forget that Stamp Duty and fees could eat into your margins.
How we can help with your commercial property investment
However you want to invest, and whatever you want to invest in, Morrison Wealth can help plan your investment.
By creating a robust financial plan with an adviser, you can incorporate commercial property investment into your goals. Your investment plans and portfolio should be reviewed regularly to enable adjustments to reflect changes in circumstances, fluctuating markets and new legislation.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.