Thinking of investing in commercial property? Here’s what you need to know
Many commercial property sectors were hit hard by Covid-19 lockdowns with people working from home, and non-essential shops and leisure facilities closing. However, there were some winners – warehouses, DIY shops and convenience stores were amongst them.
For commercial property investors in 2022 there are golden opportunities, particularly for those with a flexible approach. By the beginning of the year all UK real estate is expected to have recovered to about £53 billion.[1] In addition certain sectors, such as logistics, which are already thriving are predicted to continue to see healthy returns well into the future.
If you are considering becoming a commercial property landlord in 2022, here is what you need to know.
What type of commercial property is the best investment in 2022?
The pandemic has affected commercial property sectors very differently. Here we discuss the pros and cons of investing in each.
Hotel and leisure
By 2025 it is predicted that domestic demand for holiday accommodation in the UK will be nearly 30% more than 2019. However, lack of international visitors to the UK will slow recovery in international tourist hotspots like London.
It is expected that our more flexible working lifestyles will have a positive impact on the leisure industry as a whole. Businesses who offer real value for money are most likely to thrive.[2]
Industrial and logistics
The industrial and logistics sector remained strong in 2021, within online retailers accounting for most warehouse space. The growth in online retail means there is predicted to be demand for an additional 59 million sq ft of logistics space between 2021 and 2025.[3]
Online retailers need to hold high volumes of stock so they can deliver goods to us quickly. This has pushed up demand for space. There is also competing demand from medical suppliers and food producers.
Offices
The demand for office space is likely to remain lower than pre-pandemic with many people continuing to work from home. By the start of 2022, it is predicted that UK office rental values will have declined by 5.3%.[4] Consequently, there are potential bargains for savvy investment landlords.
Office spaces fall under Use Class E in the Town and Country Planning (Use Classes) Order 1987. This means they can be adapted for other uses such as food retailers, financial services, gyms, healthcare, nurseries and light industry activities. Commercial landlords looking for long-term investment properties could potentially reap high capital gains.
Retail
The retail rental market is subdued, with many well-known high street shops having closed their doors. However, some sectors have weathered the storm well. DIY shops, homeware stores, pet shops and convenience stores, amongst others, continue to perform well.[5]
Again, there is an opportunity for investors who are willing to purchase spaces to adapt. Vacant retail spaces can be transformed into leisure facilities including beauty salons, coffee shops, health clubs and restaurants.[6] The pandemic has seen people placing high value on social and leisure experiences and this looks set to continue.
Are you looking for a long-term or a short-term investment?
Before investing in commercial property you need to consider whether you are looking for a long-term or short-term investment.
If you are seeking a long-term investment you might want to consider whether there is scope to adapt your property to a new use class if there is a change in the economy. For an immediate return on your investment, it is essential to choose a property type and area that will see healthy capital gains within your timeframe. Alternatively, you may want to explore different ways of investing in commercial property (see below).
Your timescale will affect the type of property you invest in, the location you choose and how you finance your investment.
What else should you consider when looking for a commercial property?
Other factors that may affect your investment decision are:
- Your personal experience. Do you have experience with a particular type of property or business sector? Maybe you have refurbished an office before?
- A gap in the market. Have you noticed an unmet demand for a particular type of property in an area?
- An up-and-coming location. Have you pinpointed an area where regeneration projects are taking place, there are increased employment opportunities, new transport links being developed or new companies moving in?
Whatever your considerations, our commercial property experts at QualitySolicitors can offer you clear guidance to plan your investment and to achieve your investment goals.
Should you purchase or lease a property?
If you are looking for a commercial property from which to run your own business, here are the pros and cons of purchasing versus leasing. It is advisable to speak to your commercial property solicitor who can help you to decide which option is best for you.
Advantages of purchasing
Purchasing a property means you own it outright once any mortgage is paid off.
Commercial property offers the potential for significant capital growth. You might also benefit from tax relief.[7]
If you rent out the property, or part of the property, to another business you will gain rental income. Leases are longer than with residential properties which can mean a more secure income over a longer period of time.
You will also have more scope to make changes to the property than if you take out a lease.
Disadvantages of purchasing
The disadvantages of owning your property are that you are more responsible for maintenance costs and mortgage repayments, and that your cash will be tied up for a number of years. There are also government tax changes to keep an eye on in 2022.
Advantages of leasing
If you take out a lease you are renting a property from another owner. There may be an option to take out a lease-to-own plan if you think you might like to purchase the property in future.
Taking out a lease means your cash is not tied up, you will not be responsible for structural maintenance of the property and your rent will be tax deductible.[8] Renting also gives you the flexibility to relocate your business should you wish to do so.
Disadvantages of leasing
Rental payments can be higher than mortgage repayments, just as with residential property. You will also have to pay the landlord’s service charge.
Lease terms are long and if you need to leave the property before your lease agreement is up, you will still be liable for rent. When the lease is drawn up your commercial property solicitor could negotiate a clause in the lease that allows you to sublet.
You will not benefit from any long-term capital growth in the property.
Options for purchasing a commercial property
Commercial property is not limited to wealthy investors only. There are a few options available.
Direct investment
This is when a property is purchased outright or shares in a property are purchased.
Direct or ‘bricks-and-mortar’ fund
Smaller investors can invest through schemes such as open-ended investment company (Oeic), a unit trust or an investment trust.
These schemes invest the participants’ money in a portfolio of different types of commercial property, which spreads the risk across sectors.
Indirect property fund
Investors buy shares in a company that has a portfolio of commercial properties. This could be a real estate investment trust (REIT) or a publicly traded homebuilder. Investment is through the stock market which means shares can go up and down.
Income is paid to investors (or shareholders) in the form of dividends.
Why choose QualitySolicitors commercial property solicitors?
At QualitySolicitors we understand that commercial property is one of your most valuable assets. We provide all the legal and practical guidance you need to make your investment a success, whether you are a new or an established landlord.
We advise on the sale, purchase, management and finance of commercial properties. We also draft leases, resolve disputes between landlords and tenants, manage planning and environmental issues and much more.
Our commercial property solicitors have extensive experience across a range of sectors including industrial, medical centres, leisure, offices and retail. We adopt a proactive approach and always go the extra mile to tailor our service to our clients’ business needs.
To find out more please call 08082747557
[1] CBRE, UK Real Estate Market Outlook Mid-year Review, https://www.cbre.co.uk/research-and-reports/UK-Market-Outlook-Midyear-Review-2021
[2] CBRE, UK Real Estate Market Outlook Mid-year Review, https://www.cbre.co.uk/research-and-reports/UK-Market-Outlook-Midyear-Review-2021
[3] CBRE, UK Real Estate Market Outlook Mid-year Review, https://www.cbre.co.uk/research-and-reports/UK-Market-Outlook-Midyear-Review-2021
[4] CBRE, UK Real Estate Market Outlook Mid-year Review, https://www.cbre.co.uk/research-and-reports/UK-Market-Outlook-Midyear-Review-2021
[5] Carter Jonas, Commercial Market Outlook, https://www.carterjonas.co.uk/commercial-market-outlook
[6] Deloitte, The future for the high street, an opportunity for the leisure sector, https://www2.deloitte.com/uk/en/pages/consumer-business/articles/the-future-of-the-high-street-an-opportunity-for-the-leisure-sector.html
[7] Financial Director, Commercial property tax implications and how to get relief, https://www.financialdirector.co.uk/2019/11/05/commercial-property-tax-implications-and-how-to-get-relief/#:~:text=There%20is%20still%20an%20exemption,at%20a%20rate%20of%2019%25.
[8] Tax Café, Business Property: Rent or Buy Premises? https://www.taxcafe.co.uk/resources/businessproperty_rentorbuy.html