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What exactly is commercial property?

Commercial Property: n. Includes business property (e.g. office buildings), industrial property, medical centers, hotels, shopping centres and retail shops.

Commercial property includes office buildings, medical centers, hotels, shopping centers, shops (with & without accommodation), retail stores, farm land, warehouses, garages, and industrial properties.


For years investors turned to commercial property as they were able to purchase the property and more or less forget about it because they had great tenants with thriving businesses that were just happy to continue trading from the premises. However, commercial property fell out of favour due to the state of the global economy, for many, investment in commercial property was not financially viable due to limited access to funding, poor market sentiment and a decline in rental value.

That was then, now in 2010 the UK market has seen major improvement in recent months with analysts reporting that UK Business is back on its feet and rental growth is set to boom once more with an increase in diverse technology firms looking for suitable premises. Many residential investors with only moderate debt are now looking at acquiring commercial property in order to increase returns. Those investors who have already cut through the general mysteries of commercial property and are in the know are taking full advantage of the current market and are certainly reaping the rewards.

Gross Yields are typically around 12% with the yield on purchase prices of around 25% per annum

Lease agreements usually put more responsibility on the leaseholder / tenant rather than the owner / freeholder and are often “Full Repairing and Insuring” (FRI) meaning the standards of the property are maintained and if necessary the owner / freeholder can legally force the leaseholder / tenant to complete any necessary works to a satisfactory standard. Commercial Lease Agreements are usually negotiated on longer terms than a typical 6-12 month residential AST

There are lots of opportunities and benefits associated with commercial property, but there are risks as well with the recent downturn in the economy having a large impact on tenant demand and commercial property prices. In fact in most areas it is the quality of the occupant that is the key factor for reliable rental payment and trouble free income. So why do so many property investors avoid commercial property?



This may be down to a myriad of reasons, the most common being:

* Transaction sizes are much larger, so dealing with large figures with multiple zero’s is never a happy prospect if something goes wrong.

* Volatile market conditions have seen up to a 50% reduction in value of some commercial properties. Sometimes even changing tenant can also affect the rental value, although if you are considering buying at the present time be happy that you are purchasing at the bottom of the market and should see substantial growth as the economy recovers.

* Difficulty in assessing the financial stability of business tenants and ability to pay the rent, especially following the economic downturn. Look at a few factors before making any decision and discuss them with your trusted advisors such as your accountant and an experienced solicitor who is used to dealing with commercial property on a regular basis. Are the proposed tenants a new business start up or do they have an established trading history? Do their trading accounts show profit? Have they been paying rent previously and for how long?

* Age and location of property. Is there much point in purchasing a crumbling building in a run down part of town with no parking and limited access and trying to offer it as suitable premises for a road haulage company? Assess the suitability of the property and take advice from an experienced business transfer agent.

* Lack of suitable commercial mortgage products on the market. There are still lenders out there offering commercial mortgages but the upper Loan To Value (LTV) limit is typically only up to 70% with lenders requiring around 140% interest cover from rent for the loan interest and assurances that void periods will not affect your ability to pay.

 

Commercial property with accommodation attached such as a retail shop with a 1 or 2 bed flat above it provides the opportunity for an extra revenue stream either as a private residential dwelling separate from the retail unit or as additional commercial space that is easily converted into offices.

There are many factors affecting investment in commercial property, higher yields and larger returns offer the prospect of a great investment opportunity and they can be extremely lucrative but not without certain risks!

 
 

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