Commercial Property Investment: What you need to know

Remay Villaester (May)

Considering buying a commercial property as an investment? This could be a good way to diversify your investment portfolio, and could potentially deliver good returns if you make the right decisions.

In this guide, we’ll take a look at the pros and cons of commercial property investment. Plus, the different ways you can invest in property, and how to get started.

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Why invest in commercial property?

Buying commercial property, such as office space, shops, industrial units or leisure facilities, can be seen as a sound investment. Here’s why:

  • It can provide a steady stream of rental income from tenants. And being the landlord of a commercial rather than a residential building, you can have a more professional business-to-business relationship with your tenant.

  • You can invest in property as a way of diversifying your investments, and minimising risk. Property is separate from other asset classes, and values grow or fall independently from what’s happening on the stock market. This means that if one investment fails, you’ll have another unaffected asset to fall back on.

  • There’s the potential for good returns when you sell up, in addition to rental income. Property values tend to increase over time, so as long as you manage the property well and sell at the right moment, you should be able to bring in a decent profit.

Are there any disadvantages of commercial property investment?

All investments come with some risks, challenges and pitfalls, and commercial property is no different. Here are some important considerations to bear in mind:

  • You’ll need to make a sizable initial investment. Compared to buying residential properties, you’ll usually need to pay a lot more upfront for a commercial property. There may also be some large bills to pay for repairs, improvements and maintenance.

  • You’ll have ongoing property management costs to pay. You can structure your tenancy agreement so that the tenant is responsible for at least some maintenance, but otherwise you’ll need to pay tradespeople to maintain the building. Alternatively, you can pay a property management company to do it for you.

  • Property investment isn’t without risk. Values may not increase as you’d hoped, or could even drop in the case of a recession or the property market bubble bursting. You may face issues selling or even tenanting your building, or have to pay far more than you’d like to cover maintenance or refurbishment costs.

Different types of commercial property investment

There are a few different ways you can buy commercial property as an investment. These include buying a property outright, through a collective investment scheme or through indirect property funds. Let’s take a closer look at each of these approaches in turn:¹

Direct property investment

This is the simplest and most direct way to add commercial property to your investment portfolio. You’ll search for property for sale, then buy all of the property or a share in it - just like buying a residential house. Take a look at our guide to buying a commercial property.

Bricks-and-mortar funds

You can also invest in commercial property through a direct commercial property fund, also known as a bricks-and-mortar fund. This involves using a collective investment scheme such as a unit trust or open-ended investment company (OEIC).

This kind of fund invests directly in a commercial property portfolio, one which isn’t usually available to smaller or individual investors. This could include supermarkets, large warehouses and office blocks, or a combination of these property types.

Indirect property funds

This approach involves a collective investment scheme as above, but with a key difference. An indirect property fund scheme invests in the shares of property companies on the stock market, rather than directly in the buildings themselves.

If you’re looking to use property investment to diversify your portfolio and spread risk, this kind of fund isn’t the ideal choice. This is because property shares through indirect investment funds can rise and fall with changes in the stock markets, just like many of your other investments.

How to get started with commercial property investment

The first thing to do before sinking money into a commercial property is to do your homework. You’ll need to thoroughly research the market, choose from the investment routes above and do your sums.

You’ll need to factor in the initial cost of the investment, and ongoing property management costs if you’re going down the direct route. Next, weigh these costs against potential returns, such as:

  • Potential for regular tenant income
  • Capital growth - the predicted increase in the value of the property

And how involved do you want to be in the maintenance of the property? If you’d like a more hands-off investment, you’ll need to find a good property management company.

It could be a good idea to seek professional advice, to help you make a sound investment decision that really pays off - and reduces your exposure to risk.

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So, that’s pretty much it - all the essentials you need to know to dip your toe into commercial property investment for the first time.

Just make sure you do your homework, take your time and get expert advice if you need it. Property investment is a big move, so you’ll need to make sure you’re making the smartest decisions to get the returns you’re looking for. Good luck!

Sources used for this article:

  1. blog post

Sources checked on 25-May-2021.

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