Commercial property: The basics

Welcome to the complex and lucrative world of commercial real estate.

The commercial property market is made up a variety of sectors: offices, industrial, retail, hotel and leisure and raw, undeveloped land.

Beyond these sub-sectors, property is divided by quality into prime, secondary and tertiary properties.

Prime is good-quality property that is usually located in large towns and cities and often in high demand, while secondary and tertiary forms are of a lesser quality, so investors find it more difficult to fill them with tenants.

On the upside, the latter two do not come with a hefty price tag and due to their risky nature, may offer higher returns.

Why should I invest in commercial property?

With the residential market overcrowded with buy-to-let landlords, you will naturally face less competition in commercial property.

Long-term leases and capital gains resulting from when a property’s value increases means there is high potential for income and returns.

Commercial property values are calculated on how much income a property generates, meaning that commercial investment can grow if revenue also rises, making it a worthwhile long-term venture.

Why not go beyond the UK and look at properties in any international territory - the options are endless.

What are my investment options?

There are several ways to enter the market. The most common option is direct investment, in which a private investor will invest directly in a share, or all, of a property.

Indirect property funds are also a way in. These are split into traditional bricks and mortar funds that will invest in the property directly and a property securities fund that will buy shares of property listed on the stock market. The latter means that your investment can fluctuate rapidly, as shares move up and down on markets, but will allow you to build a diverse portfolio of investments with a less immediate involvement and without too much risk.

For larger investments, such as offices, supermarkets and warehouses, you could invest in a REIT (Real Estate Investment Trust) such as British Land or Land Securities. These organisations will invest into large properties on behalf of smaller investors.

Where do I profit from investment?

There are two main ways to earn money from commercial investment: the income you receive from a tenant when you rent the space, or the capital gains profit you get when selling it if your property increases in value.

What factors do I need to be aware of?

Commercial investment is always a big step to take, so these factors should be carefully considered:

Investors should consider diversifying their property portfolios, across offices, retail and industrial, to avoid any sector-specific risks. Funds, for example, should hold at least 40 properties.

Three words to remember are Location, location, location. Regardless of what property you are investing in, area is key for tenants, customers and clients.

Aim to get a lot of space for your money. This will encourage multi-tenant letting. This means that if one or a few tenants default on their payments, you still have income coming in from other tenants so you can meet your monthly mortgage repayments.

What key terms do I need to know?

There are a series of 'buzzwords' that you need to be able to define before you enter the market:

Capital value - The value of a property that is based on the income that it generates yearly.

Yield - This is a measurement of future income on an investment that tells you how much of an annual return you are likely to get. This refers to the interest or dividends received and is usually expressed annually as a percentage.

Security of tenure - The right of a tenant to continue to occupy a dwelling unless the landlord obtains a court order for possession of the property or termination of the tenancy agreement.

Break clause - A term in a tenancy agreement (tenant lease) that enables a tenant to leave before the tenancy period should end.



Melanie Luff

About the author

Mel wrote for all titles in the Dynamis stable including BusinessesForSale.com, FranchiseSales.com and PropertySales.com as well as other global industry publications.

@Be_TheBoss

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