Commercial property acquisitions often demand a significant investment from a cost and time perspective. The move can potentially produce profitable returns but bear in mind that it is a specialist market and there are several considerations that need to be made before completing on an investment. To give you a helping hand, we’ve put together some top tips on what to consider when investing in commercial property.
What to Buy and What to Look Out For
Commercial property covers a whole host of different types, including offices, retail space, industrial/warehousing, as well as classes such as leisure and medical establishments. Whilst each sector will differ in market trends, the two main things you need to consider which will affect the long-term value of any property are the location and the quality. You need to know and be able to express what you need and want from your property. Getting a checklist together that is listed by priority of needs is a great way to keep focus and help you make compromises when required. You should also consider the following:
- Is the property in a location that will attract tenants?
- Are there any proposed planning or development projects that may positively or negatively affect demand?
- Whether it’s modern or traditional, is It built with the future in mind? Can the space offer a long-term lease opportunity to a good-quality, stable tenant?
Lease Terms
The terms of an occupational lease will have a direct effect on the overall value. Every lease agreement should be meticulously reviewed to analyse their influence on the value of the commercial property and the continuous management of that asset. Often, provisional examples that could potentially have a financial bearing include rent review frequency and the basis upon which they are assessed, limitations on the tenant’s repair duties, restrictions on service charge recovery, etc.
Survey Safety
Whether it’s your bank, your funder or even for yourself, you will need to know if the true value of the space you’re about to acquire justifies the investment you’re about to make. A building survey is a ‘must-do’ as it allows you to discover if there are any significant issues with the property. It would then be necessary to review these issues alongside the repair covenants in the lease. An unrestricted full repair and the insuring lease will oblige the tenant to put and keep the property in good repair; however, dilapidations law is a complex subject and needs careful consideration. A reputable chartered surveyor will be able to carry out a full structural survey to determine these potential faults. It’s always better to spend money to get this done, as it could potentially save you substantial amounts of money if problems are found.
Covenant Strength
The current financial status and position of the existing tenant or tenants will contribute to the investment value of the commercial space. Any property which is let on a long-term lease basis should offer a secure income. Unfortunately, if the tenant(s) in question are susceptible to financial hardship, then you will be at risk of missed rent payments as well as significant costs to obtain possession and put it back into re-letting condition. Therefore, it is crucial that you guarantee the covenant strength of your tenant and ensure you receive copies of filed accounts, payment records, and financial assessments to establish their position.
Look at Ways to Get Reliefs
Depending on where you want to invest in your property, there are certain ways that you can obtain spaces that will offer cost benefits and reliefs to you as the investor. Take, for example, BPRA (Business Premises Renovation Allowance), which offers tax incentives for those looking to restore derelict properties that haven’t been used for a year back to ‘business use’. There are also things like land remediation relief, which gives you a corporation tax break for both capital and revenue costs incurred by companies that are cleaning up acquired land from a contaminated state. Business rates relief is another benefit available to you, so as you can see, there are several positives available to you depending on your situation.
Planning
Something that can often be taken for granted during an investment is planning permission. While this should be in place, it is worth double-checking this as restrictions in planning policies or permission relating to your purchase could affect future redevelopment.
Rules & Regulations
When it comes to commercial property, there are several rules and regulations that affect the process. Aside from the typical fire, building and asbestos regulations, you will need to be highly aware of the Energy Act 2011. Something that not all buyers know: this legislation will mean that it will be against the law to allow a commercial space with an EPC (Energy Performance Certificate) rating that is below E. This will commence officially as of April 2018 but if you have a potential property that is currently rated as an F or G, it will be vital that you find out what needs to be done to improve efficiency before going forward.
Be overprepared.
Whatever the investment acquisition you make, risk will always be a factor, which is why it is so fundamental to be prepared and have a fall-back plan if the first-choice property falls through. You should always stick to your investment strategy and criteria, making compromises only for the greater good. As you’ve seen, there are a lot of elements to take into consideration before making your purchase, which is why it is always best to seek professional help. Your first step should be to contact commercial property agents in your chosen area, as they’ll be best positioned to offer you accurate advice about the location and the potential the property may have for you.