Investing in bricks-and-mortar commercial property
Commercial property investment has become increasingly attractive to UK investors, with the sector delivering impressive returns. In 2024 commercial property brought in a total return of 7.7%, which was higher than the returns in 2023 and 2023, but also higher than the average annual return (7.2%). In 2024 capital values for commercial property rose by 1.8% and rental values by 2.9%. It follows that investing in bricks-and-mortar commercial property can be lucrative - provided you know what you’re doing of course.
When exploring commercial property investment in the UK - whether purely as an investor or as a prospective owner-occupier - you'll encounter various property types including office buildings, retail space, industrial units and storage facilities. The key to investing successfully in commercial real estate is understanding how location, functionality and tenant demand influence your investment's performance. Unlike residential properties, commercial properties tend to offer longer lease terms and higher yields, making them an even more attractive proposition.
The benefits of investing in commercial property
Investing in commercial property offers several significant advantages that make it an appealing asset class for both new and experienced investors.
Higher rental yields: Commercial properties generally offer better returns than residential properties, with yields often ranging from 5-10% annually. This higher income stream can provide substantial cash flow to support your investment portfolio and long-term financial goals.
Steady rental income: As mentioned, commercial tenants usually sign longer lease terms, often spanning 3-25 years, providing predictable income streams. This stability allows for better financial planning and reduces the vacancy risks commonly associated with residential properties.
Capital appreciation: Well-located commercial properties in areas with strong economic fundamentals tend to appreciate steadily over time. As rental income increases and property values rise, your investment can deliver both ongoing returns and long-term capital growth.
Tax benefits: Commercial property investment offers various tax advantages, including depreciation allowances, interest deductions on commercial mortgages, and potential capital gains tax reliefs. These benefits can significantly enhance your overall investment returns.
Professional network expansion: Investing in commercial real estate connects you with business owners, property professionals, and other investors, expanding your professional network and potentially opening doors to new business and future investment opportunities.
Key considerations to investing in commercial property
Before diving into your first commercial property investment, several crucial factors require careful consideration:
Initial capital requirements
Commercial property investment usually demands substantial upfront capital. Most commercial mortgages require deposits of 25-40% of the property value, which is significantly more than residential property loans. You'll also need funds for legal fees, surveys, and potential refurbishment costs. So, it’s important to calculate your total investment requirement carefully, including contingency funds for unexpected expenses.
Tax costs and implications
Understanding your tax responsibilities is crucial when investing in commercial property. You'll face stamp duty on commercial property purchases, which varies based on the property value and your circumstances. VAT considerations may also apply, particularly for new-builds or properties where VAT has been opted for. Again, these costs should be thoroughly considered as they can really impact your returns.
Business structure considerations
You also need to decide whether to invest as a sole trader or through a limited company structure. Each approach has different tax implications, liability considerations, and ongoing compliance requirements. Limited companies often provide greater tax efficiency for higher-rate taxpayers, but involve additional administrative responsibilities and costs.
Commercial landlord responsibilities
Becoming a commercial landlord involves a lot of responsibilities, including property maintenance, health and safety compliance, insurance management and tenant relations. Unlike residential lettings, commercial leases often place repair responsibilities on tenants, but landlords still have obligations. Think carefully about whether you have the time and expertise to manage these duties, or if you'll need professional property management services.
Property selection strategy
Choosing the right type of commercial property is vital for a successful investment. You need to consider factors such as location accessibility, local business density, future development plans, and the specific needs of your target tenant market. Office space in business districts, retail units in high-footfall areas, and industrial properties near transport links each offer different risk-return profiles.
Professional support team
Successful commercial property investment requires expert guidance. Qualified property consultants who understand local markets, commercial solicitors familiar with lease negotiations, and accountants specialising in property investment taxation can all help you navigate complex transactions and optimise your investment strategy.
Market demand assessment
It’s also key to thoroughly research local market conditions, including vacancy rates, rental trends, and future development plans that might affect supply and demand. Understanding your target market's needs helps identify properties likely to attract and retain quality tenants, which all helps to ensure consistent rental income.
Lease terms and rental income
Commercial leases are typically more complex than residential ones, with various terms affecting your returns. When deciding on/negotiating lease terms, consider factors like rent review clauses, break options, tenant covenant strength, and responsibility for repairs and maintenance. It’s also worth noting that longer lease terms generally provide more security, but may limit rental growth opportunities in up-and-coming markets.
Ready to invest in commercial property?
Investing in bricks-and-mortar commercial property can be lucrative, offering the potential for strong yields, steady income, and long-term capital appreciation. Success depends on thorough research, careful financial planning, and assembling the right professional support team to guide your investment journey.
We at The UpCo have been supporting clients in commercial property investment for years, from research and acquisition stages right through to managing properties on our clients’ behalf.
We’d love to discuss your investment goals with you and share how we can help you get the best property and the best returns. Feel free to get in touch with us via hello@theupco.co.uk or call 0151 542 5000.
