I’m aware that many readers of this column are already sophisticated commercial investors. However, there are many who also read this column that haven’t yet dipped their toes in the waters of commercial property investing, and this one is for you! If you are wondering whether commercial investing may be a good idea, read on and I will attempt to provide a balanced view of commercial investing. It’s not for everyone and this isn’t an attempt to ‘persuade’ anyone – please do form your own views.
Commercial property investing is different from residential investing. Commercial properties tend to be located in largely different areas of towns and cities, they are valued differently, and investors can increase the value of commercial property in different ways to residential.
For a start, commercial real estate tends to have longer leases, which means they can be very hands-off investments, especially if you can secure a full repairing and insuring lease (FR&I). An FR&I lease means that the tenant is responsible for repairing and maintaining the property (inside and out). At the end of the lease a tenant will have to hand back the property to the landlord in the same condition they took it, save for fair wear and tear. Not all commercial leases are FR&I, and whether you are able to achieve this type of lease is down to supply and demand in the market you are investing in, and the relative negotiating positions between the landlord and the tenant.
Even if you can’t achieve this type of lease however, compared to HMO’s and other high management residential properties, commercial real estate tends to still be more hands off which, in turn, means you can invest remotely. You will notice that I haven’t used the word ‘passive’ – as I don’t believe that any property investments are truly passive, and you will still need to check in with your tenant and the property over the term of the lease to protect your investment. With an FR&I lease in place the net and gross rents can be very similar – as there are far fewer landlord management costs – the tenant will be responsible for the repair and insurance of the property, as well as the business rates and the energy bills.
If you are a residential investor, you will be aware of the Section 24 tax regime, and the 3% stamp duty supplement you must pay when buying residential investment properties. This does not apply with commercial investing and commercial real estate has its own stamp duty regime. Due to the preponderance of sophisticated and corporate investors in the commercial property market, it is likely that future Governments may not be so quick to penalise investors in this sector, as opposed to those in the residential market. And whilst we are talking about tax, commercial investors can currently claim capital allowances on plant and machinery installed in commercial premises – which is a significant tax perk. Before you buy commercial real estate, make sure that you speak with a capital allowances specialist who can help you navigate this complicated, but lucrative angle.