How to invest in commercial property: what’s the process?

What are the different types of commercial property investment?

Investing in property investment comes with many options, including the type of property you choose.

If you want to invest in commercial property, these are the most common options:

• Office: Office space encompasses single buildings to large complexes, housing businesses of all sizes. Prime locations in major cities command high rents, while smaller towns offer lower costs but potentially lower demand.
• Industrial: Industrial property includes warehouses, factories, and distribution centres. E-commerce growth has boosted demand in this sector.
• Multifamily rental: Multifamily rental properties, such as flats, provide steady income streams due to consistent housing demand. However, location is vital, with factors like transport links and local amenities influencing rental yields.
• Retail: From shops to office space, retail property costs vary significantly based on location, size, condition, and property type. Prime London offices can reach tens of millions of pounds, while smaller industrial units in regional areas might cost a few hundred thousand. 

Beyond physical property, you can invest in commercial property through REITs and property funds.

REITs are companies that own and manage commercial property and offer shares on the stock exchange.

Property funds are collective investment schemes that pool money from multiple investors to invest in real estate assets, such as commercial properties, residential buildings, or development projects. 

Why is investing in commercial property a good idea?

There are many reasons why investing in commercial property may be worthwhile, including: 

Lower risk

Commercial property is generally considered less volatile than other investments, such as stocks. Leases provide stable, long-term income, reducing the impact of short-term market fluctuations. 

Less competitive

The commercial property market is often less competitive than residential, especially for specialised properties, making it easier to find attractive deals.

A potential high return on investment

According to Cushman and Wakefield, commercial property can generate significant returns through rental income and capital appreciation.

While the average return on investment (ROI) varies depending on factors such as location and property type, it typically ranges from 6% to 12% per year. 

In recent years, the pandemic has impacted specific commercial property sectors, particularly offices. While certain areas experienced decreased demand and lower ROI, others, like industrial properties, saw increased demand and higher returns due to the growth of e-commerce.

Less time consuming

With longer leases and professional property management options, commercial property investment in the UK can be less hands-on than residential, freeing up your time. 

More flexible

Commercial leases offer more flexibility regarding rent reviews, lease terms, and tenant responsibilities, allowing you to tailor agreements to your investment strategy.

What are the limitations of investing in commercial property?

Investing in property offers attractive benefits, but it's important to know the potential drawbacks.

Difficulty finding a tenant

Vacancies can significantly impact your income stream, and finding suitable tenants can be challenging, especially in less desirable locations or during economic downturns. 

Higher upfront costs

Acquiring a commercial property typically requires a larger initial investment than residential property, including the purchase price, legal fees, stamp duty, and potential refurbishment costs.

In the UK, the average upfront cost can range from hundreds of thousands to millions of pounds, depending on the property type and location.

Limited market exposure

Compared to more liquid investments like stocks, investing in commercial property may mean limited market exposure - it can take time to sell a commercial property, and finding a buyer at your desired price can be challenging, especially during market downturns. 

Higher maintenance costs

Due to their size, complexity, and usage, commercial properties often have higher maintenance and repair costs than residential properties.

Market volatility

Although generally less volatile than stocks, commercial property values can fluctuate depending on economic conditions, interest rates, and local market dynamics.

Changes in demand for specific property types, like the shift away from traditional office spaces, may also impact rental income and property values.

Is it better to invest in commercial or residential property?

Whether investing in commercial property is a good idea depends on your individual preferences and financial goals. 

Commercial property often appeals to those seeking higher potential returns and longer leases, making it a better choice for investors with a larger capital base and a long-term investment horizon.

On the other hand, residential property might be a better fit for investors who prefer a lower initial investment and greater liquidity. Residential properties generally require less capital upfront, making them more accessible to a wider range of investors.

They also tend to be easier to buy and sell, providing more flexibility if you need to access your capital quickly.

From a tax perspective, commercial and residential properties are subject to taxes such as stamp duty land tax (SDLT) and capital gains tax (CGT). However, the rates and thresholds differ, with commercial properties generally facing lower SDLT rates.

How to invest in commercial property

Want to invest in commercial property but unsure where to start? You have some options. 

Buying a property directly requires having capital upfront, but REITs and property funds let you invest smaller amounts gradually. Essentially, this is like buying a stock, but the stock is part of a commercial property.

You drip-feed your investment by investing in a company or fund instead of a physical building. This allows you to gain exposure to the property market without directly purchasing and managing real estate.

Get expert financial advice

Investing in property investment remains a lucrative venture for prepared investors, especially following the Covid pandemic.

There are various options available for commercial property investment in the UK. However, doing thorough research and seeking professional advice is crucial for making financially sound decisions.

Let Unbiased match you with an expert financial adviser who can offer guidance on your property investments to ensure you maximise your ROI.