Property has long been one of the most popular forms of investment, and commercial property in particular has long attracted the interest of seasoned business buyers accustomed to valuing the assets independently of the target trading company.
Business buyers are often attracted to companies with commercial property among their list of assets because of the sometimes-hidden value associated with that can come with the business-owned premises. But it’s not without risk.
Many property investors suffered when the financial crisis struck in 2008, but since then the market has staged an impressive comeback. According to Legal & General Property (LPG), investors ploughed more than £60 billion into the commercial property markets in 2014, up from £52 billion the previous year and almost twice as much as in 2012.
According to LGP, investments are set to surpass last year’s performance, with buyers hungrier than ever to capitalise on the booming market. On the other side of the fence, naysayers point out that the boom has been built on extremely low interest rates that may not last for long, precipitating a change in the cycle. Wherever we are in the cycle, a strong feature of the current market is the strength of the commercial property market outside London. This decentralisation effect has been born out of the high cost of residential stock in the capital, with more firms seeking offices in areas where staff can more easily afford to live and commuting is cheaper. Today’s graduates are more mobile than they have ever been.
A commercial property can deliver financial returns in a number of ways.
Reasons for buying a commercial property
One reason why someone would buy a commercial property is so they can use the site for their own business. Whether it’s a shop on a busy high street, office space in a business park or a warehouse in an industrial park, having the right commercial premises can be key to a business’ success, which means business owners are always on the look-out for the right property.
In this respect, buying commercial property – or buying another business that owns commercial property – is advantageous for long-term growth. Buying a commercial property at the right price can reduce a firm’s operational expenditure.
However, when it comes to profiting from a commercial property itself, the buyer typically needs to develop the site for rental purposes or a resale somewhere down the line.
As with residential premises, buying a run-down commercial property and giving it a new lease of life will almost always add value to the asset. The owner then has the option of using the property, renting it out to tenants, or putting it back on the market with the aim of achieving a sale price greater than the combined cost of the property purchase and the renovation work undertaken. One entrepreneurial strategy sometimes used is to buy a vacant commercial property at a price reflecting its untenanted status, fill it with an owned business on a short to medium term lease, then immediately put the property back on the market at a premium that reflects the rental income and grade of tenant.
Ultimately, the owner must choose their desired path to profit. Not only must they pick between rental and resale, but the owner must also decide whether to maintain the commercial property’s current use or transform the site into something new. For example, a city centre office block could become high-end flats, while a large shop could be transformed into a luxury restaurant; this decision will naturally depend on the premises and what there is demand for in the area.
Indeed, the old cliché that it’s all about ‘location, location, location’ is just as relevant to the commercial sector as it is the residential market. When buying a commercial property, one must always consider the geography of the site; properties in desirable places – particularly when it comes to offices, shops, hotel and restaurants – will always fetch higher rental or sale prices.
Business owners will sometimes relegate the importance of the company-owned property assets in favour of the trading business, and this is where most of the emotional attachment often lies. An entrepreneur prepared to do his or her research can find that beneath a lacklustre trading business, there may be a property that can be separated from the trading concern and sold off for more than its book value. In some cases the vendor may be completely unaware of the below-market value of the property asset, however because of his/her tax position - it may be in order to qualify for Entrepreneurs Relief - the business and property need to be disposed of in a bundle.
Beware of the risks
Property is typically deemed a safe investment. After all, people will always need houses and businesses will always need premises to operate out of. However, there are risks to be considered.
Firstly, people buying commercial property must always be wary of investing in too many sites close to one another. To use the old adage, you should never put all your eggs in the same basket. And if an investor buys many properties in a single area and that region, for whatever reason, then experiences a dip in property prices, they could find their present and future returns disintegrating.
Investors should be wary not to rely on too small a property portfolio; again this increases risk as one downturn in a certain area or market could see them lose money. Casting the net far and wide to build a diverse, broad portfolio is often the best approach to achieving profit while safeguarding against potential losses.
Buying commercial property also requires large amounts of capital upfront. This can, of course, be supplemented with various funding options, but the investor must ensure their property development plans will enable them to still profit from the venture even after debts have been settled.
Commercial property on the up
Buying commercial property has the potential to become more lucrative than ever over the coming years thanks to the geographical diversification of British business. In short, London is no longer the only place to do business, and as mentioned above, and booming industries in other parts of the UK could fuel growth in the commercial property market in the future.
The construction of the HS2 railway links, combined with Chancellor George Osborne’s desire to create a ‘Northern Powerhouse’, means cities like Manchester, Leeds and Newcastle are likely to experience substantial business growth over the coming decade. And as businesses are created and grown in the areas, it’s a certainty that the need for commercial property will rise at pace.
Those who are willing to begin building their commercial property portfolio and have the right strategy in place of what to do with these sites to maximise their returns stand to profit greatly from this investment market.
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