WHY SMALLER INVESTORS ARE TURNING TO COMMERCIAL PROPERTY

Published 7 June 2017

Lancelot Road - Commercial buildingThe latest figures from the Council of Mortgage Lenders show that the number of properties bought as residential buy-to-let investments fell by 42% in the last 12 months, following a series of Government measures put in place to cool the market.

Hit with a three per cent stamp duty penalty, a general tightening of buy-to-let lending, and new measures restricting the tax which can be set against mortgage interest, potential investors are not entirely abandoning the market – but they are starting to look to see where else within the property market they can achieve better returns.

Perhaps this accounts for the fact that a record number of private investors are now buying commercial property investments – a sector which has traditionally been shunned by smaller-scale, individual investors.

It’s not hard to see why that change has come about.  There are many advantages to commercial property investment, and these come under the broad headings of yield, security of tenancy, and landlord’s responsibility.

It isn’t just about the stamp duty hit, although savvy investors have realised that buying a mixed use property – a shop with flats above, for example – exempts them from the three per cent surcharge.

Yields on good commercial property investments can be anywhere between six and ten per cent, compared with five to six per cent on residential buy-to-let properties.  What’s more, leases are generally much longer, giving guaranteed income and a much lower chance of voids.  A long tenancy in residential is 12 months; in commercial it can be 15 years or more.  And rents tend to be paid quarterly in advance, helping with cash flow.

Another key difference is that a commercial tenant generally takes on responsibility for buildings insurance and, crucially, repairs and maintenance.  So the landlord simply collects the rent and leaves the tenant to worry about things which as a residential landlord, would be their problem.

Of course, as with any potential investment there are pitfalls, and it is the perceived complexity of commercial property investment which puts many smaller investors off.  Lease documentation tends to be more complex, planning regulations about the actual use of the building may be restrictive, and vetting potential tenants is crucial.

Actually, residential buy-to-let can be just as fraught, and the same advice applies: get expert advice, keep up to date with relevant law, and don’t assume that being able to raise the finance to invest qualifies you to manage the investment itself.

Despite all that, commercial property investment is becoming more popular with private investors, some of whom are being driven away from the residential buy-to-let market by rising taxes, increasing regulation and a demonization of residential landlords by some sections of the media.

It is worth saying, however, that the ‘traditional’ residential buy-to-let market is far from finished.  Long term house price growth continues to be strong, and it is that combination of rental income and longer-term capital growth which is keeping the residential lettings market from collapse in the face of repeated regulatory and fiscal attacks. 

But it is not necessarily the no-brainer investment choice it once was for the smaller investor; commercial property is definitely edging its way into the mix at this level.

Contact: ROBERT FLINT


Rob Flint

 

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