Many would-be investors are drawn to commercial property. Even in times of economic uncertainty, people like the idea of investing in bricks and mortar which can feel more real than a purely financial investment. A commercial property can be the foundation for a long-term income stream, as long as it is chosen carefully and well managed. There are traps for the unwary, so it is vital to get good legal advice before you commit yourself.
‘In an uncertain market where property prices may be falling, there will be bargains for smart investors,’ explains Ashley Bevans, Partner at Wollens and Head of the commercial property team with. ‘To make your investment pay, you must understand what your ongoing costs will be and ensure you have a good tenant occupying under a well-drafted lease. Your solicitor will be a valuable partner.’
Your investment strategy
The first decision is whether you want to buy a property in good condition which will produce an income immediately or go for a cheaper property which needs some work, and then invest in improvements. These could make the property more attractive to tenants and boost the level of rent you can charge. That should in turn increase the capital value of the property. The challenge is to balance your initial investment against a realistic view of the likely rent.
Whichever approach you choose, location is important and this will depend on the type of property. An industrial or logistics unit will rely on good road links, while an office will need parking and public transport close by as well. Many commercial tenants like to take premises close to other complementary businesses, particularly in the retail and hospitality sectors.
Traps to watch out for
Once you have identified a property you are interested in, your solicitor will carry out a due diligence exercise, investigating both the legal title and aspects of the surrounding area that could impact on your investment.
Enquiries of the local authority and planning department will tell you whether the property has direct access to a publicly maintained highway and should reveal any proposed development in the near future. Data from the Environment Agency will tell you the likely risk of flooding. This can have a significant impact on the cost of insurance for you and your tenant, so it very important to check this before you buy.
The range of data available for your solicitor to search is increasing all the time, so you should have a discussion with them about your immediate and future plans for the property to help them decide which searches to carry out.
The legal title documents will reveal whether the property has the benefit of any necessary rights over neighbouring land, for example for access, escape routes, or to run pipes and cables. Private rights like these often come with an obligation to contribute to the cost of maintaining shared facilities such as private roads. Your solicitor will make sure you know what to expect, so you can factor it into your investment decision.
It is now vital to think about the energy performance of a building you plan to buy, because it is unlawful to let commercial property with a rating below EPC E. The seller must give you a current EPC at the start of your negotiation. The government is expected to raise the minimum energy rating for letting property to EPC C by 2027, rising to EPC B by 2030, so you should consider how easy it will be to improve energy performance from its current level and how much that is likely to cost.
Securing your income stream
If you buy a property that is already let to a tenant, you will expect to get the benefit of a ready-made income stream. It is still important to investigate the current tenant, to make sure they are financially sound.
Your solicitor will check any existing leases, to spot any problems. Key points to check include:
- Is it a full repairing and insuring (FRI) lease, under which the tenant will bear the cost of maintenance and insurance? Your solicitor will warn you if, for example, there are any limits on the tenant’s repairing obligations, perhaps by reference to a schedule of condition.
- How long is left on the lease? Linked to that is whether the tenant has a right to stay on and claim a new lease under the Landlord and Tenant Act 1954. If you are uncertain about the financial strength of the current tenant or have plans to get vacant possession so you can redevelop, it is crucial to know how easy it will be to get them out.
- Do you as landlord have rights to develop, perhaps adding floors to the roof of the building, extending or changing the layout of common areas?
If the property is vacant, your solicitor will need to draft and negotiate a lease or leases. Depending on the local market for commercial property, you may have to wait to find the right tenant, as well as factoring in the time it will take to settle the form of lease. If there is already plenty of vacant property for tenants to choose from, you should be prepared to offer a rent-free period as a sweetener.
Any successful investment property must be well managed. You may decide to do this yourself or you could pay professional agents to do it for you. First time investors are often surprised at the time it takes to deal with the day-to-day running of commercial property, so you may decide that paying an agent is money well spent. Either way, your solicitor will also be able to guide you through any future discussions with tenants and advise you on redevelopment plans.
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