Thames Valley: Hicks Baker advises on investments in commercial property
As residential buy-to-let investments become less attractive many people are switching some or all of their portfolio to commercial properties, writes Giles Blagden of Hicks Baker.
There are many potential advantages of doing this. However, no investment that is likely to deliver an attractive yield is without risk. As with anything else, a wise investor understands those risks and takes positive steps to minimise them. The most effective strategy for managing risk is to choose the right property to invest in, in the first place.
The residential and commercial property markets are very different. So, you should start by taking advice from a specialist commercial property agent who understands the differences as well as the relative merits of different sectors and who will offer the expert impartial advice you need. An industrial estate will, for example, perform differently to a high street shop.
The important thing is to develop a strategy and not be swayed from it without good reason and in particular consider whether your investment is for income or capital growth and for the short, medium or long term.
Do your research
There’s no substitute for research. It can take a long time to sell a commercial property if you decide to change your investment strategy or find you invested in the wrong premises.
Finding the right type and size of property, in the right location are the foundations of a successful investment. Compromises in any of these areas may prove risky. If a property has a history of being hard to let or a succession of tenants whose businesses failed, you will need a good reason (such as a significant anticipated change in the character of the surrounding area through new development or infrastructure – much like we have seen in Slough with Crossrail) to believe that the future will be any different.
Properties with established and stable tenants are clearly more desirable. These will cost more, but will be easier to finance if you need to borrow.
Is the price right?
Purchase price is an area which you can control. Negotiate the price based on a realistic view of the rental income at a level you would be confident of reselling if you have to.
Ultimately your business case has to stack up: purchase price, finance and legal costs, building work and running costs, balanced against rental income.
Above all, be wary of properties that have a tempting low-price tag. It may look like an easy way to make money but there will be reasons. The location for example may have deteriorated or the building become obsolete for the type of use and remember the cost of building works and timing can be hard to budget accurately.
Stick to what you know
Another way to minimise risk is to invest in an area that you know well and not scatter your investments around the country. You should have a good idea of how long vacant properties remain empty for and what type of tenant is likely to be suitable in the event your property falls vacant.
A property that is empty for a prolonged period will not just hit your income, you will also become liable for the business rates, higher insurance premiums and maintenance costs.
There are many reasons to consider investing in commercial property. There are risks too. The most effective way to manage those risks is to get good advice.
To discuss more about investing in commercial property, email Giles Blagden: [email protected]
