With all the talk in the commercial property market today about investments, developments, yields and Auctions it’s easy to get confused: we have put together a simple easy to digest guide on: Commercial Property.

We believe that you will be blown away by the information we have in this guide. so go ahead and check out Our ultimate Guide on commercial property!

Commercial Property Investment is more difficult to get into then residential investment, once you understand it the rewards are endless.

CHAPTER 1

To Benefit from Investing and developing commercial property, You Need to Know How to Find (and develop) Them

You may have been considering investing in commercial property for some time – for a number of reasons. There is, for instance, more stability in commercial property than residential (commercial tenants tend to refurbish and stay for longer periods of time), leases of between 10 and 15 years aren’t uncommon and, as the landlord, you can look forward to fairly regular rent rises.

Better still though, profits are high (with gains of up to 19 per cent in 2014). And, reassuringly, those profits aren’t as susceptible to the stock market as other ways of investing your hard-earned cash.

You may, however, be unsure about where and when to initially dip your toe into the water. That’s understandable – for, while many of us are familiar with the intricacies of the residential property market, when it comes to investing in commercial property we can be just as clueless as the man (or woman) next door.

It’s precisely for this reason that we have devised this quick and expert guide to commercial property investment in London and throughout the UK. We hope you find it useful. Certainly it’s something you can refer to throughout your search as well as skim from time to time. So, without further ado, we’ll get on

Location, location, location

Just as with residential property, finding the right location for commercial property is absolutely essential. Go wrong here and you might as well forget about any profits you’ve been dreaming off.
There was a reason house hunter Kirsty and Phil’s popular TV show was called Location, Location, Location. We can’t stress enough how important it is to find the right spot for your commercial property investment.
It will not only dictate how much you can charge tenants, but also whether they will be interested in moving there in the first place. And it all very much depends on the type of business/tenant you’re hoping to attract.
A high street location with heavy footfall would be absolutely essential for a retailer, for instance. That’s because they need to attract customers by displaying eye-catching goods. However, the same location would prove utterly useless to a small kitchen and bathroom manufacturer since loading restrictions would affect deliveries and supplies. That same business would prefer to have good access to transport links however so an outlet near a motorway would be ideal in their case.
A high-tech or IT business would be better suited in an out-of-town warehouse since they could save on rental costs while an insurance company intent on recruiting a lot of staff would need to be near good public transport links and with cafes/shops nearby in order to attract staff in the first place.
If it’s a sought-after area the commercial property is in then there’s a good chance these properties don’t come up often, and you’ll be able to command higher rents. If, on the other hand, there’s a whole lot of new retail premises or offices going up round the corner then you could normally expect your rental income to increase dramatically, thanks to the competition. In other words, supply and demand is just as relevant in the commercial property world as it is in retail, manufacturing and other business sectors. It’s for this reason that it’s often worth considering buying in an area you’re already with familiar with.
Another factor to remember though is that you’ll probably have to pay a pretty penny for that sought-after location as a result your profit margin (yield) will be lower than if you’d paid ‘an average’ rent. The good news in this scenario though is that the actual building itself should have very good potential for capital growth.

Niche Markets: Where to locate the highest yields or capital growth

Finding your niche
So how do you decide which sector within the commercial property market you should make a bee line for?

Investing in retail property

Of all the commercial property sectors, this is the one which is hardest hit by fluctuations in the economy ie if people don’t have money to spend, shops close (who can forget the likes of Woolworths, Habitat and other big high street names closing stores right, left and centre during the recession)? On the plus side, this sector does tend to result in high yields if you get your timing right. It’s also the most popular of all sectors. Statistics website Statistica showed the value of the retail property sector in the UK in 2013 was £305bn with second place offices trailing behind at £195bn.
Meanwhile, the more shopping traffic a location attracts then the better as far as this sector is concerned. But check there’s parking spaces for customers (otherwise they may go elsewhere) and somewhere for your suppliers to drop off goods.
Check the crime statistics for the area too, as well as the street and overall lighting while you’re at it.Decoration can be a big expense here; make sure you’ve put the money away for it.

Investing in hotels

One of the fastest growing areas of the commercial property world, hotels are viewed by many as the ultimate in passive investment ie the hotel chain itself will see to the maintenance of the building etc, leaving you plenty of time to swan off and enjoy your profits. Luxury hotels tend not to suffer from an economic downturn while boutique hotels these days are benefitting from more inexpensive online booking and marketing. It’s all good!

Investing in land

Land is often another ‘hands off’ investment and can be inexpensive to pick up (since most owners don’t even live anywhere near it and are often keen to get it off their hands). Because of this there can be good deals to be had. However, if you’re planning to sell it on to a developer at some stage then it’s essential to ensure there won’t be any difficulty getting planning permission. It’s also worth remembering that, unlike buildings, land never depreciates in value (unless it’s later found to be contaminated!). Meanwhile see our later section Buying on the Fringe Line (4).

Investing in warehouses

The phenomenal growth in e-commerce has resulted in an increased need for warehouses to store goods and act as distribution and delivery centres (think Amazon). Because of this logistics is a growing specialist area and one in which warehouses will play a central role.

You may have been considering investing in commercial property for some time – for a number of reasons. There is, for instance, more stability in commercial property than residential (commercial tenants tend to refurbish and stay for longer periods of time), leases of between 10 and 15 years aren’t uncommon and, as the landlord, you can look forward to fairly regular rent rises.

Better still though, profits are high (with gains of up to 19 per cent in 2014). And, reassuringly, those profits aren’t as susceptible to the stock market as other ways of investing your hard-earned cash.

You may, however, be unsure about where and when to initially dip your toe into the water. That’s understandable – for, while many of us are familiar with the intricacies of the residential property market, when it comes to investing in commercial property we can be just as clueless as the man (or woman) next door.

It’s precisely for this reason that we have devised this quick and expert guide to commercial property investment in London and throughout the UK. We hope you find it useful. Certainly it’s something you can refer to throughout your search as well as skim from time to time. So, without further ado, we’ll get on

CHAPTER 2

Capital Growth Hacking: What is it?

Well, Capital Growth hacking is a term we coined by us, to describe Capital growth in the property sector, within a specific pocket around city centre with the most potential grow, let’s take the example of London to be more specific, Stratford during the London hosted Olympics, most of us knew that Stratford would grow, due to the rise of the new Westfield shopping centre, this was due to bring continuous footfall, even though many of us were scared to think of investing in property around this area as the land surrounding was barren, also the risk of something short-term like the Olympics was a big problem, most of us knew that the Westfield will bring continuous traffic to the area but we were scared that the capital growth would be short term, if you had invested near here during this time you would have made a killing.

This sums up our explanations to capital growth hacking.

Knowing your Next steps: do your homework!

Whether you’re deciding two buy residential or commercial the most important decision to make sure you know that the area can support enough business and footfall to bring people to the area, If the location has demand for local trade than both residential and commercial market will thrive, giving you the best possible chance for capital growth.

below are examples of research that can be carried out before purchasing.

CHAPTER 3

Buying cleverly at auction

One good way to buy commercial property is to invest in a residential property with a shop attached at auction this is usually called “commercial with uppers“. New Planning legislation introduced in February 2015 means it’s perfectly legal – and easy – to convert the existing commercial property into residential property or to sell it on separately (often without the need for planning permission). See this Guide to Change of Use in the government’ planning legislation.

Online sites which give you information on forthcoming auctions include:

Property Auction Action

Eigroup.co.uk
Property Auctions
Allsop.co.uk
Acuitus.co.uk
Barnettross.co.uk

You can also find information from trade magazines such as Estates Gazette or from your local Chamber of Commerce.

Auction house Acuitus reported its best ever auction results in October 2015, having raised £67.6m with a success rate of 89 per cent. This included the £1.725m sale of a freehold retail warehouse investment to an online bidder.
Another successful real-life case study in the same auction involved the sale of a 3,526-sq ft restaurant in Leamington Spa’s Regent Street to the chain Cafe Rouge until 212. At a current rental of £97,000pa it sold for £1.7m at a yield of 5.3 per cent.

The number of people buying commercial property at auction has actually been increasing in recent years – despite a stagnant residential market. In fact, according to RICS commercial property rents are due to increase to their fastest rate since 1998. However it does requite a lot of research to ensure you do get that investment asset bargain you’re looking for. Properties sold at auction are usually below market value because more often than not they’re repossessions or the seller is looking for a quick sale for whatever reason.

The best part about buying at auction is that you don’t have to wait around for weeks to find out if the property is yours – you’ll find out on the day of the auction and when sold it’s all legally binding i.e. there’s no going back (hence the need to do your due diligence prior to the auction).

Registering with any of the big six auction houses in the UK will mean you’ll be aware of potential bargains in advance since you’ll be a sent a catalogue a few weeks prior to the actual day of the auction. You’ll then be able to register an interest in the property. Be aware though that the guide price may change at any time until the day of the actual auction. The next step is to find a lender (if needed) and obtain a ‘decision in principle’ from them.

Viewing a property before bidding on it is essential. Taking a surveyor or architect along will mean you’ll find out about any structural problems on the spot. If all is well at that stage your solicitor can check planning permission notifications nearby and if there’s permission to build on the actual auction property. It’s then time to take a closer look at the site and work out if it’s suitable for the purposes you have in mind i.e. the particular commercial sector.

Next stage is a survey and an advance offer to the auctioneers in writing. If accepted you’ll be expected to pay a deposit of 10 per cent immediately and the remainder within 20 working days. In the event you don’t the property may go on to auction and you’ll have lost that deposit.

At the actual auction you’ll need to show ID such as a banker’s draft to cover the money on the property you’ve registered for as well as proof of address. It’s worth checking the addendum sheet to ensure nothing’s changed on the lot you’re interested in.If the property doesn’t sell for the reserve price then it may be worth checking with the vendor to see if they’ll sell for what you’re offering.

CHAPTER 4

Buying on the fringe line

Buying land on the ‘fringe line’ i.e. the border between two areas such as Surrey and London, is another way to acquire commercial property provided planning permission is granted from the local council. This land will obviously be less expensive than in the center of either area and it can be a good investment with the potential for a lot of profit.

CHAPTER 5

Buying commercial property from estate agents

Estate agents can sometimes deal in commercial property too and it’s worth taking the time to introduce yourself so that the agent knows exactly the type of commercial property you’re looking for. This means that when something comes up he or she will probably contact you first before they advertise it.

CHAPTER 6

Knowing your yields

Unlike in residential property where yield is calculated by subtracted expenses from income, commercial property yields are a bit more complicated. Equivalent yield is initial yield but, since rents are regularly fixed for long periods, there is also a reversionary yield. The latter divides the capital value of the property by the rental value).

As a result typically current income return is calculated via the next proposed rent increase and the rental value of the property discounted to the end of the lease. The calculation is

CV = r/y + (RV-r)/y (1+y)-t ] where;

CV = current capital value

r = current rent under the lease

RV = current rental value (or market rent as defined in valuation standards)

t = time to next rent change

y = the equivalent yield

one word to end this section is due diligence!

CHAPTER 7

Borrowing

Commercial mortgages carry a longer term than residential – typically a minimum of 15 years – and usually a deposit of up to 30 per cent. However, you could qualify for a particular type of capital gains tax relief when you come to sell (provided the company you let it to isn’t listed on the stock exchange). Meanwhile, taking out a personal mortgage isn’t the only way to invest in commercial property as you’ll find out soon…

CHAPTER 8

Knowing your choice of lender

When it comes to the critical bit of choosing where you’re going to get the loan from to buy your commercial property, there’s quite a bit of wading to be done. By that we mean sifting through what’s available on the market (ie the type of finance to go for) and who’s going to provide it.

Commercial mortgages

Securing a commercial mortgage is far more complex than simply looking for a loan to buy a residential property.
Loan to value (LTV) ratio
In terms of the property itself you should be able to access a loan for around three quarters to 80 per cent of the property’s value (this is known as the LTV rate). This is provided the property isn’t leasehold and there no difficulty with the land it’s build on or the surrounds and that the term of the lease is reasonable (it can be anything from five to 30 years, although around 15 years is standard).

Just like residential mortgages, their commercial counterparts can involve a fixed or variable interest rate. Fixed rate deals are usually for between two and five years and provide stability; variable rates, on the other hand, could benefit from low interest rates (although chances are in the UK interest rates are set to rise in 2016 and beyond).
It’s also worth noting that interest rates will usually be higher with a commercial mortgage since it’s viewed as riskier for the lender. For this reason it’s advisable to have a deposit of at least 20 per cent – otherwise interest rates will be much higher.
Meanwhile, there will be the usual mortgage fees – Arrangement (between 0.5 and 1.5 per cent of the loan’s value), Valuation (£300 to £700) and Legal (£1,000 to £2,000).

Meanwhile, like residential mortgages, commercial mortgages can also be used to refinance or redevelop a commercial property.
Both banks and building societies provide commercial mortgages although for a better deal it’s often advisable to go through a specialist mortgage broker (who will have access to lenders not available via the High Street route). The National Association of Commercial Finance Brokers has a list of such individuals.
Investing via a Pension Scheme
Another way of investing in commercial property is by using a pension scheme. This can be done via a couple of routes, either a Self Invested Personal Pension (SIPP) or a Small Self Administered Scheme (SSAS). Both are commonly referred to as investment regulated pension schemes.

The reasons for going down this route are many. For instance:

  • Investing in a commercial property this way results in tax relief on contributions used to buy it in the first place
  • Any growth in the property value over the years won’t be subject to Capital Gains Tax.
  • You won’t have to pay income tax against commercial rent (which will be valued on the open market)
  • No inheritance tax is due against the property
SSAS

This is often used to buy commercial property and it’s where you effectively buy as a company. That’s because it’s a small occupation pension scheme set up by a company’s directors. Each becomes a trustee of the pension fund and gets a decision on how the money should be invested. It means you’ll pay less tax as a corporation than a personal investor.

SIPP

This is a personal pension plan which is established via an external financial body such as an insurance company. Employer contributions can be added. The great benefit of a SIPP is that it’s like buying property with a huge discount (up to 40 per cent).

Commercial property types

The typical properties bought via the above pension schemes include shops, offices, public houses, nursing homes, warehouses, hotels and farmland. And it doesn’t matter whether the property or land is freehold or leasehold.
As with a commercial mortgage, the property can be refurbished or developed (provided there isn’t a residential element – with the exception of a care taker’s flat). It’s worth noting that pension schemes can also be used to buy a property at auction. The latter is actually a good way of purchasing commercial property since many shops in particular tend to have living quarters above. It’s possible then to sell the residential element and keep the retail half.

 

Our Choice of commercial lenders

CHAPTER 9

Rates

All commercial property – with a few notable exceptions – are subject to business rates issued by the UK government. These vary throughout the nations but share the same principles in that commercial property, like residential council tax, is subject to local authority financial demands. These are usually paid annually but it’s sometimes possibly to pay monthly.
The exception to the rule is if the property is a farm building or land, a church or the building is sued by disabled individuals. Even empty buildings are subject to tax after three months.
Business rates are worked out based on the rateable value of the commercial property.

CHAPTER 10

Investing With Joint Venture Capital

There are lots of reasons investing in commercial property via a joint venture partnership scheme makes a lot of sense.
For a start it gives a novice investor in the commercial property sector access to an expert’s knowledge thereby minimising risk. Secondly, it provides additional finance for that deal you know is a good one but you just don’t have enough capital to go it alone.
Other benefits of a joint venture partnership include:

    • Letting you sleep better at night. Knowing there’s someone acting for you who knows exactly what he or she is doing with your money certainly cuts back on high-stress levels.
    • Making your money go further. Your JV colleague will undoubtedly make sure the best deal is realised.
    • Tipping you off about future investments. They will have the contacts and the knowledge of how the market operates.
    • Being able to keep some of your cash. Who knows what other potential investments may be round the corner?
      A JV Partnership is a legal entity where a contract drawn up by solicitors identifies each investors role in the project. Often it’s the case of the investor sitting back and letting the expert ‘get on with it’ ie finding the property, tenant and even managing it on a daily basis. It’s an excellent way for a first-time commercial property investor to get a foot in the door and to learn about the business from an expert. Importantly, it also improves the chances of making a decent profit at the first outing.
      The future of commercial property investing
      With the economy on the up it is clear there will be many more commercial investment opportunities in the coming years. The number of business start-ups will increase while existing companies will be looking to expand and relocate to bigger rented premises. Increased demand will undoubtedly lead to bigger profits.
      The general public too will have more spending money in their pockets and with it an increased confidence.
      Higher demand can only lead to one thing – higher profits for the canny investor.
      Find out more about acquiring commercial property from one of our experts here at

CHAPTER 11

VAT on Commercial Property

VAT on commercial property is often over looked and people seem to think that the it is a one off payment for vat on the purchase price, well this is simply not true, if a property is elected for vat at any point in the life of the property it will automatically need to charge the tenants vat and pay the liable VAT every quarter. for more information See Here

CHAPTER 12

Stamp Duty For Commercial Property