7 Steps to a Profitable Rental Commercial Property

Commercial real estate as an investment opportunity is an interesting proposition. However, before you embark on a property search, there are several things to think about – from the type of commercial building you want to invest in to whether you want to make the purchase solely as an investor, or as an owner-occupier. Other important considerations are location, condition of the property and flexibility for potential change of use.

While investing in commercial property is a growing trend that can undoubtedly offer good returns, it certainly doesn’t come without risk. That’s why it pays to carefully evaluate all aspects of a potential property to ensure the space is worth your time and money and you’ll get a decent return on your investment.

Here are seven essential things to pay close attention to:

Don’t just buy a property because it looks like a good deal and then try to figure out what to do with it afterwards. It makes much more sense to purchase a commercial property with a purpose. According to Phoenix & Partners, a London-based firm of chartered surveyors, the majority of commercial property types in the UK are: offices, retail (shops, supermarkets, retail warehouses), industrial (warehouses, factories), leisure (restaurants, pubs, gyms, hotels) and alternative properties (petrol stations, schools). Always purchase with a plan for what the building is going to be used for.

Location is one of the most important factors to consider when purchasing an investment property. For example, a shopfront business will fare better in a central location. If the operation is geared around remote transactions, out-of-town options are more practical. Think about how the commercial property will suit business needs, be it yours or those of your tenants. For example:

• Type of property: retail, offices, leisure or industrial.
• Type of investment: freehold or leasehold.
• Transport: air, sea, rail and road links.
• Parking facilities and restrictions.
• Delivery facilities and restrictions.
• Congestion charges.
• Local amenities for staff.
• Proximity to pool of potential employees, including colleges and universities.
• Closeness to other businesses, suppliers or clients.
• Space configuration.

Always get a full structural survey. Not only will hiring a structural surveyor act as a precaution from poor property purchases, it will also prevent any defects from arising in the near future.

Set a budget and include hidden costs. Along with the mortgage – mortgage lenders tend to ask for a deposit of 20% of the value of a commercial property, sometimes more – there are several costs you’ll face at the outset including:

• SDLT (Stamp Duty Land Tax). Commercial properties have lower SDLT rates, which range from 0% on the first £150,000, 2% on £150,001 to £250,000 and 5% on £250,000 plus.
• Construction and repair costs.
• Environmental compliance costs.
• Decorating and refurbishment.
• Buying and fitting out the space with furniture and equipment.
• Setting up facilities, including establishing IT.
• Professional fees.

Then there are ongoing costs to factor in, such as:

• Insurance.
• Maintenance and repairs.
• Services, including security and cleaning.
• Local authority charges, including waste collection.
• Retaining a commercial property estate agent to manage the building.
• Business rates, which are worked out by multiplying the rateable value of the commercial property – set by the Valuation Office Agency (VOA) – by the Uniform Business Rate (UBR).
• Energy costs. The vendor will give you an Energy Performance Certificate (EPC) which will provide guidance on how energy efficient the commercial property is and what your energy bills are likely to be.

It's wise to choose a property in a location where the demographics are stable or growing, and you should also check out which new businesses are moving into the area. If there are any anticipated changes to the road systems, it's smart to be aware of those as well, as property values may change when roads are diverted or modified.

Get familiar with the current and forecasted trends of the area around the property. Is it undergoing redevelopment? Not only can this provide a direct boost to the local economy, for example, when a local district becomes a food hub for a new university, it could also mean you’re eligible for relief allowances. These are offered by the UK government for rebuilding communities across the country and include:

• Business Premises Renovation Allowance (BPRA). This is a 100% tax allowance for certain spending when you’re converting or renovating unused qualifying business premises in a disadvantaged area.
• Land Remediation Relief. This is a relief from corporation tax only. It provides a deduction of 100%, plus an additional deduction of 50%, for qualifying expenditure incurred by companies in cleaning up land acquired from a third party in a contaminated state.

Investors often look for properties with tenants already in place. In the UK, commercial tenants are typically responsible for building maintenance and repairs, especially where a full repairing and insuring lease (FRI lease) is in place. This is in contrast to residential property investments where the responsibility for building maintenance and repairs usually falls to the landlord. When choosing commercial tenants, seek out those with a good reputation and strong, reliable finances to minimise the risk of their defaulting on financial or other obligations during the lease term.

Choose a property that provides you with flexibility in the event that a tenant defaults, the surrounding area changes or something else doesn't go to plan. In these situations, you'll want to have the ability to change the property’s use or reconfigure the space to attract different tenants. Always remember that commercial properties are more sensitive to the economy, so the property you choose should be adaptable to shifting market trends. If you plan to redevelop the building or alter its intended use, you may require planning permission.

However, there are exceptions, where legislation allows some changes between use without full consent. For example, the Government introduced permitted development rights in 2013 to allow offices to be converted into homes without the need for full planning permission; but always get advice from the local council and commercial real estate agents.

This article was originally published on Realla on 8 August 2019.