Commercial Real Estate Basics

During this article we explore the benefits of investing in commercial property and run through a basic check list that every buyer should follow.

As a result of the raised stamp duty rates and the less favourable tax relief available on mortgage repayments, the housing market saw a record low of the amount of houses for sale. Investors are now considering investing in commercial property for the first time rather than residential property.

Commercial properties include:

  • retail buildings
  • office buildings
  • warehouses
  • industrial buildings
  • ground rent investments
  • a mix of the above

There are many myths about buying commercial property such as it is too expensive for the average buyer, it is too risky and you need to be an expert to buy commercial industry property. Perry Hill Surveyors can help you through this. In some cases, these may be deceptive. There are many advantages to buying commercial property – we explore the pros and opportunities associated with commercial real estate investment below.

Why buy commercial real estate, what are the opportunities and what return will I get?

Property is always generally an attractive investment opportunity though commercial properties typically offer more of a financial reward than residential properties. You can usually invest directly by buying a fund which holds actual physical property in its portfolio or by buying a property yourself. Or, you can invest indirectly by investing in property companies, developers and house builders, or in funds invested in those companies. There are many advantages to investing in commercial property over residential property which we outline below.

Income: The best reason to invest in commercial over residential rentals is the earning potential. Commercial properties generally have an annual return off the purchase price between 6% and 12%, depending on the area, which is a much higher range than typically exists for single family home properties (1% to 4%).

Professional tenants: Business owners will have more of a professional relationship with you as a tenant in comparison to a residential tenant. There will generally be more of a business-to-business customer relationship which will ensure the interactions are of good manner and conversions will be more efficient. Communication like this removes many possible problems that could come with an unprofessional residential tenant.

Building Repairs & Maintenance: Commercial tenants will be more inclined to keep the property well cared for and of good quality as it is a representation of their business. This helps you maintain and improve the quality of the property without needing to cover costs of damages from carelessness.

No late night calls: As these properties will likely be empty at night there is minimal chance of receiving a panic call in the middle of the night about a lost key. You only need to work when the business owners and employees are at work which is usually during normal day time business hours. Should a break in or a fire alarm happen in the middle of the night, you would usually have an alarm monitoring service that notifies the proper authorities as well.

Limited expenses: The lessee takes care of property expenses directly as well as real estate taxes, such as business rates, service connections such as gas, water, electric and drainage, repairs, and tenants improvements.

Income stream: It is common that a commercial property is purchased with the occupational tenant and lease already in place so there is no delay before receiving income. Rent is usually paid months in advance as well so income stream and cash flow is positively impacted.

Buying commercial real estate checklist

Buying commercial property for the first time can be a daunting time. Understanding the basic knowledge and having a check list in place will give you some peace of mind. See our checklist on buying commercial real estate:

  1. Explore the commercial property market and come up with a realistic budget.
  2. Location is key and you may want to look right in the city centre or just outside the inner city. Find a location that will attract the tenants you are looking for.
  3. Check local laws such as noise restrictions in the area you are looking at, make sure you are fully aware of all the restrictions you will need to adhere to in the area.
  4. Thoroughly check the condition of the building as you could be faced with high repair and maintenance costs if you have not carried out the proper checks.
  5. Make sure this is what tenants are looking for rather than just what you are looking for.
  6. Bring in a commercial real estate agent that will be able to help you make a more informed decision. See our services and how we can help you.

Perry Hill Commercial Property Services

Our team has overseen more than £200 million worth of sales and purchases since 2003. We successfully handle commercial property sales and lettings for all property types including office, retail, industrial, warehousing, leisure, mixed use and development land.

Our clients include private wealth, trusts, estates, business occupiers, receivers, lenders, investors and developers. We pride ourselves on our ability to close transactions at full market value, quickly.

Our property management services cover an array of disciplines, supported by our extensive knowledge and experience of the local property market. Here at Perry Hill, we ensure our property management services are thoroughly planned in order to effectively build strong Landlord and Tenant relationships.

Find out more about our services and how we can help you.