Deciding to become a commercial property landlord is a substantial move, with a host of legal risks to consider.
Having an understanding of the sector and knowing your legal obligations as a landlord is essential before investing.
Understand the commercial property sector
The UK commercial property market is made up of various sectors which include:
- Retail spaces
- Offices
- Industrial units
- Leisure facilities
- Hospitality
- Life sciences
- Hotels
Each sector responds differently to changes in the economy and legislation, as well as technological advancements.
Remember to understand and analyse the market and the trends in that sector as this will help you make the initial step towards successfully investing in commercial property.
Economic indicators
There are lots of economic changes which offer invaluable insights into the situation of the commercial property market.
These include:
- GDP growth
- Employment rates
- Consumer spending habits
- Infrastructure
- Inflation and interest rates
- Supply and demand
- Change in Government policies and legislations
Make sure you understand and recognise these changes as this will help you to invest in commercial property when the time is right and when you will benefit the most.
For example, a stable and continually growing economy typically signals a strong demand for office and retail spaces, whereas a significant decrease in an economy might prompt you to approach potential commercial property investments with caution.
Legal framework
The legislation surrounding commercial property are complex, and can be difficult to understand and navigate, with regulations covering planning permissions, building regulations, tax obligations and environmental considerations.
As a commercial property landlord, there are many responsibilities you must adhere to which include:
- Health and safety – Under the Health and Safety at Work Act 1974, you are responsible for health and safety matters relating to communal areas
- Fixtures and fittings – ‘Fixtures’ are items that are attached to the property, such as lighting systems. ‘Fittings’ are items not attached to the property such as a picture. You are responsible for all the fixtures and fittings you own and these must be safely installed and maintained properly
- Gas and electricity – Responsibility for gas safety might lie with you or your tenant, dependent on the conditions set out in the lease. You do, however, have a legal responsibility to ensure a property’s electrical system is safe and complies with regulations
- Insurance: Usually, you will be required to pay insurance costs upfront and pass this onto the tenant. It is in your interest as landlord to arrange insurance and it is equally important that you have the right level of cover and one that covers any losses should damage occur. Being uninsured can lead to damaging financial repercussions which could be avoided.
Understanding the legalities that surround a commercial property investment will ensure you fulfil your landlord obligations.
Investment strategies
Developing a consistent investment strategy will build a successful commercial property investment.
You should consider your long-term objectives, risk tolerance, and capital availability when creating your approach.
Investment strategies can include:
- Buy-to-Let – These mortgages are a type of secured loan, where your commercial property is the security. They are ideal for limited companies that wish to invest in commercial property, with the aim to let to a third party such as an office or retail space
- Renovating to lease or sell – This strategy includes buying a property for less than the market value, renovating it and then immediately selling it for profit but can become difficult when the property is commercial. To combat these challenges, you need to conduct extensive research on your budget as well as preparing for a large commercial mortgage and protecting your property against fluctuations within the market
- Direct and Indirect Commercial Property Funds: This involves the investment of commercial property through investment funds, unit trusts, Open ended investment companies (OIECs) and real estate investment trusts (REITs).
Investment decisions
To aid your journey into commercial property investments, there are two important investment decisions you need to consider.
You might wish to invest in commercial property funds (such as unit or investment trusts) as these either directly own properties or buys shares in property-related companies. This means you will be paid returns based on the growth in the value of the shares and the payment of dividends.
You also might want to consider having a mortgage as an investment – commercial mortgages have medium to long loan terms, ranging from approximately three to 30 years. Lenders generally offer a loan-to-value (LTV) ratio of up to 75 per cent for commercial investment mortgages and are available on either an interest-only or repayment basis.
You can choose between a fixed or variable rate. If those options aren’t for you, there is always the option of indirect commercial property funds. These funds buy shares in companies that invest in property.
The shares are listed on the stock exchange and traded on a daily basis – they don’t have the liquidity problems of direct commercial property funds, meaning you can move in and out of the fund freely.
While you get the benefit of the liquidity of an equity-like product, you also get the volatility of investing on the stock market.
We can provide tailored advice to help your investment goals, ensuring that your venture into commercial property is informed and well thought out.
To begin your journey into commercial property, please contact our team today.