As a traditional British custom, many people aspire to own a house or flat. In fact, the bulk of the buildings in the UK are homes. However, according to sites like Rightmove Commercial and Zoopla Commercial, commercial property accounts for 13% of the value of all buildings across the UK.
Most of the commercial property sector consists of the following:
- Offices: any building that is used for commercial, professional or bureaucratic work
- Retail: shops, supermarkets, shopping centres and out-of-town retail warehouses
- Industrial: warehouses and factories
- Leisure: restaurants, pubs, cinemas, gyms and hotels
There are some alternative commercial property types such as petrol stations.
Becoming a Landlord for Commercial Real Estate
A large proportion of the investor population in the UK is made up of commercial property landlords. When becoming a landlord for this asset type, you should consider the supply and demand of rental opportunities for businesses (your future tenant) in specific region/town. One method of checking this would be to review the local listings for business rental properties in the area. This will provide a clear overview of the variety of properties available for businesses to rent. The latter will also allow you to understand the average rental values for similar properties and subsequently determine potential rental yields.
Finding Commercial Real Estate to Buy
If you are able, choose a good time to buy commercial property. You don’t ideally want to do it at the top of the market when prices are high. Our recommendation is to look at the trends in the local and national commercial property market. You should consider the below:
- Value of commercial property
- Supply of commercial property
- Availability of commercial mortgages
- Appetite of competing investors
- Tenant demand and rental values, if you plan to let the commercial property
At Blue Alpine, we can provide you with market reports for different regions and towns.
When deciding which commercial property to buy, the location and building type are also key factors. We suggest you consider the following:
- Type of property: retail, offices, leisure or industrial
- Type of investment: freehold or leasehold
- Size / space configuration
- Transportation links and parking
- Nearby occupiers
- Local amenities
Location. Location. Location…is the old adage for investing in residential property. Well, it is even more important when assessing commercial property for sale. It is not enough to just target city and town centres as a prime location for businesses, you will need to consider the business entities that may be future occupiers of the premises and/or your business as an owner occupier. While retail and leisure businesses tend to benefit from a central location with heavy footfall and readily accessible transport links, there may be some limitations to consider such as parking restrictions and congestion charges. This could also cause problems with deliveries of supplies to these businesses.
Important to note – Commercial property is divided into use classes under the Town and Country Planning (Uses Classes) Order 1987. This legislation determines how each property is occupied. You will need to ensure that any business carried out in the commercial property you plan to buy is in line with its planning use.
We have provided below an indication of the use classes:
- A1 shops
- A2 financial and professional services
- A3 restaurants and cafés
- A4 drinking establishments
- A5 takeaways
- B1 business
- B2 industrial
- B8 storage or distribution
- C1 hotels
- C2 residential institutions
- C2A secure residential institution
- C3 homes
- C4 houses in multiple occupation
- D1 non-residential institutions
- D2 entertainment and leisure
Are you considering undertaking property development?
If you plan to redevelop the building or alter its intended use, you are likely to require planning permission. However, there may be exceptions to the rule where legislation allows some changes between use without full consent. You are welcome to contact us to discuss the property and your development idea.
An example of an exception relates to the Government introducing permitted developments rights in 2013 to allow offices to be converted into homes without the need for full planning permission. You should always seek advice from the local council and an experience commercial consultant on the feasibility.
Freehold Commercial Property for Sale vs Leasehold Commercial Property for Sale
In the UK property market, you will need to choose between owning commercial real estate as either Freehold or Leasehold. Freehold properties tend to make up the most of commercial properties available to buy in any given region and city. For Leasehold, you may or may not be legally bound to pay a ground rent. You should look carefully at the Leasehold agreement before purchasing this type of property investment to understand ground rent, lease expiry, service charges, etc.
For Freehold properties, there are many advantages over Leasehold. One advantage is the purchase of a Freehold building means that you do not have to worry about the lease expiring. Another positive attribute to owning Freehold property is that the value may appreciate over time and allow you to resale for a capital gain. The disadvantage to Freehold is that these properties may command a higher purchase price compared to Leasehold properties. It is important to note that while commercial real estate can rise in value, these properties can also decrease in value.
Determining the Cost of Buying a Commercial Property
In most cases, a deposit of 10% is required when contracts are exchanged to buy commercial property. The remainder is then paid when the deal completes. If both the Buyer and the Seller agree, a simultaneous exchange and completion can occur.
When buying a commercial property investment, you will have several other costs to consider, which can include:
- Advice: Most buyers need assistance from professionals, including a commercial estate agent, lender and solicitor
- Stamp Duty Land Tax: You must pay the tax if you buy commercial property valued at more than £150,000, the current threshold in England and Northern Ireland. The SDLT on the portion up to £250,000 is 2% and a sale price above that incurs 5%.
- Stamp Duty has now been replaced with the Land and Buildings Transaction Tax in Scotland and Land Transaction Tax in Wales
- VAT: In most cases you will be able to treat the transactions at TOGC (Transfer of Going Concern). You will need to discuss this with your accountant.
- Fees associated with arranging a commercial real estate loans (mortgage)
You should also consider the ongoing costs of maintaining commercial property too. If you plan to let out the commercial property, you will likely want to share some of these bills with your tenant. You suggest you consider the below costs of maintaining commercial real estate:
- Repairs and maintenance
- Services, including security and cleaning
- Local authority charges, including waste collection
- Retaining a commercial property estate agent to manage the building
- Commercial mortgage repayments (if applicable)
You also need to understand the tax implications of owning commercial property (non-domestic buildings), which is called business rates. Business rates 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). The VOA’s valuations are revised every five years. The most recent revaluation came into effect in England and Wales on April 1, 2017, based on the rateable values from April 1, 2015. The local council will provide you with a business rates bill each year. There are exemptions available, such as small business relief and rural rate relief. If you plan to let the building, then the tenant(s) will be responsible for paying the business rates. However, if the building is vacant or you are an owner occupier, then you will be responsible for paying the business rates.
Another important factor to consider is energy costs. The vendor will give you an Energy Performance Certificate (EPC). It will provide guidance on how energy efficient the commercial property is and what your likely energy bills will be. The EPC is valid for 10 years and will show the energy rating for the building from ‘A’ (most efficient) to ‘G’ (least efficient). If you plan to let the building to a tenant, then the tenant will be responsible for paying the energy bills.
Finally, it may also be worth exploring whether you can claim capital allowances towards some business costs too. You should speak with an accountant to determine a possible claim for capital allowances.
Securing commercial property finance to do the deal
You may require a commercial property loan to help boost your buying position. Commercial real estate loans are widely considered one of the most common forms of finance used to buy commercial property.
There are a range of lending sources and we can help you determine your best options for financing a commercial property transaction. Lenders require a significant amount of information before agreeing a commercial mortgage. These lenders typically ask you for a range of details, such as a business plan, commercial mortgage repayment proposal and business bank statements and accounts. Commercial mortgages typically range from three to 25 years. Some lenders may be more open and flexible, while others can be a lot more restrictive in offering mortgage deals to borrowers.
Making an offer on commercial buildings for sale
When you have found a commercial property that fits your investment criteria and you are ready to purchase, you will need to make a written offer – usually to the vendor’s commercial estate agent. If the vendor refuses your offer, it is worth trying to negotiate to reach a mutually acceptable level. Remember that the vendor has several factors to consider, including your price and the speed at which you can complete the deal. When your offer is accepted, politely request that the commercial property is taken off the market to prevent other interested parties from closing in on the deal.
You should then have your solicitor carry out a searches to unearth anything that might impact the commercial property and the wider area. This search may include details of relevant planning applications, building regulations, transport development and other issues, such as contaminated land.
Exchange contracts and complete on commercial property
Once your offer has been accepted, a heads of terms (HoT) will be sent to your solicitor and the Vendor’s solicitor. This is usually done by the Vendor’s commercial real estate agent. The HoTs outlines the main points of the transaction such as the type of agreement struck, how the deal will be financed and proposed timescales. The Vendor’s solicitor will then draft a document called the sale agreement and he/she will send the document to your solicitor for review. Your commercial estate agent and solicitor will then start to negotiate the final details of your contract with the Vendor. Keep in mind that you can request an exclusivity agreement (a.k.a. lock-out agreement) to be put in place. This would allow you a specified timescale to carry out the due diligence knowing that the vendor will not negotiate with any other party.
During the legal process, a survey of the commercial property will typically be carried out on behalf of your bank to make sure it is structurally sound and there are no major flaws that have not been accounted for.
Contracts will be exchanged when:
- both you as the Buyer and the Vendor (Seller) are satisfied with the contract
- you are happy with the state of the commercial property
- the finance to do the deal has been authorised by your bank and ready to be released
Please note, the exchange of the contracts is when buying the commercial property becomes recognised in the eyes of the law.
Other boxes to be ticked, which your solicitor can provide advice on, tend to include:
- paying Stamp Duty Land Tax
- registering your ownership of the commercial property with Land Registry
- verifying whether you need to register your commercial property for health and safety
At Blue Alpine, we can advise you on setting up insurance for the commercial property and provide quick quotes as an Appointed Representative of a major insurance broker.
The completion of the deal with occur when the formal documents are signed, dated and delivered. Your solicitor will then transfer the remainder of the purchase price to the vendor’s solicitor, and you will receive the keys to your new commercial property.
Different Ways to Buy Commercial Property
There are several ways to purchase commercial real estate.
Private Treaty – This is this most common way of purchasing commercial property in the UK on the open market. The property is typically advertised via a commercial real estate agent with an asking price and the vendor may consider offers. There could be a situation where multiple offers from multiple Buyers’ may occur. The agent may structure the offer process as a ‘sealed bids’ situation. For this type of arrangement, a date and time will be set and each prospective purchaser has to submit their best and final offer. Once the deadline has passed, the commercial agent and vendor will review the best and final offers and then decide how to proceed.
Auction – A traditional auction can seem like a quicker way to purchase a commercial property, but you need to ensure you have researched and prepared yourself before the auction date so not to make a costly mistake. On the day of the auction, once the hammer falls, the buyer with the highest bid is committed to the purchase of the commercial property. Also, the contract is exchanged on the fall of the hammer and from this point you are legally bound by the contract. The deposit is typically 10% of the winning bid amount and is payable at the same time. There will also be other fees you must consider, such as the auctioneer fees and any other fees listed in the special conditions of the auction legal pack for the respective property you are bidding on.
After the auction, you typically have 4 to 6 weeks to pay the remaining 90% balance and ‘complete’ the transaction. If you are not in a position to complete the transaction, then you will lose your deposit and the seller has the right to sue you as per the contract for the full purchase price.
Commercial properties in auction tend to be listed approximately four weeks prior to the auction date, so you will need to move quickly to get organised and conduct your research. You may be able to view the property, but sometimes this can be limited. Most auctioneers arrange group viewings at set times, once or twice a week before the auction date.
When researching the property on the auctioneer’s website or via their catalogue, the guide price is in indication of the minimum amount they expect the property to achieve. This differs to the reserve price, which is the minimum amount the vendor is willing to accept for the property. While the guide price is published in the catalogue or on the auctioneer’s website, the reserve price remains confidential between the vendor and auctioneer.
Please note that the guide prices are set to create interest among investors and should not be taken as confirmation of the real value of the commercial property. It is important for you to undertake research to understand the potential value of the property and its current condition. You should consider other properties that have sold over the last 12 months in the area. The eventual price to be paid in the auction room will depend on other investors bidding and how emotional the bidding process becomes. We always recommend understanding the price you are willing to pay for a property and not to go over this price on the day of the auction.
As a part of your due diligence for any property in auction, the auctioneer normally supplies a legal pack, containing all of the relevant documents about the commercial property. It is essential that you fully understand these documents and have your solicitor review the information to ensure there is nothing that will cause problems.
If you require a mortgage or bridging loan, you should put this in place before the auction date. If you don’t have your finance arranged prior to the auction date, there is no guarantee you will be able to raise the money after you have bid.
When arriving to the auction, you will need to register with the auctioneer to be able to bid. As a part of this process, you will need to provide identification to satisfy their KYC rules (Know Your Client) and Anti-Money Laundering requirements. If you prefer to bid over the telephone or via the auctioneer’s online website, then this may be possible. You will need to check with the auctioneer on their rules for registering.
Off-Plan – In some cases, if you plan to buy a brand-new commercial property (newly developed), you may be able to purchase off-plan. This means you are committing to purchasing a new commercial property before it has been built or before the building works has finished. In most cases, you won’t be able to view the property, the developer will supply plans, CGI’s and brochures to show you what the finished product will look like. In some cases, the developer may have a show-room set-up for you to view.
Once you have selected your property, the developer will ask you to pay a reservation fee and provide a timeline for exchange of contracts and paying the deposit. You should always double check where the reservation fee and exchange monies are held before the property is ready and what will happen to it should the developer go bust.
Once the development works have finished with the commercial property, the developer will give you notice to complete purchase transaction. Before you complete on the transaction, you should undertake the ‘snagging’ process for any faults or damage which the developer can then fix before you take ownership.
Disclaimer: The information Blue Alpine supplies is for educational purposes only, to provide investors with an overview of information regarding investing in UK commercial and residential property. This information is not to be treated as advice; it is to be used as a reference point to further conduct your own research. Assumptions made in the commentary and analysis are not reflective of the position of any entity other than Blue Alpine’s – and, since we are critically-thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold us to them in perpetuity. The authors and Blue Alpine are not to be held responsible for misuse, reuse, recycled and cited and/or uncited copies of content within this article by others.