Investing in commercial property
Discussion
Hi,
Can someone please explain how one can make an income with commercial property please...
I see a number of topics regarding BTL and often see "Have you looked at commercial property instead?" as a response.
With the amount of new offices and factories being built I fail to see how anyone can be making money except the builders. Most of them sit empty for ages and the amount of office space that's available I just fail to see how anyone can see commercial property as a good investment.
A quick drive around my area (Newcastle/Gateshead) and all you see is "To Let/May Sell" boards.
cheers,
Can someone please explain how one can make an income with commercial property please...
I see a number of topics regarding BTL and often see "Have you looked at commercial property instead?" as a response.
With the amount of new offices and factories being built I fail to see how anyone can be making money except the builders. Most of them sit empty for ages and the amount of office space that's available I just fail to see how anyone can see commercial property as a good investment.
A quick drive around my area (Newcastle/Gateshead) and all you see is "To Let/May Sell" boards.
cheers,
By basically renting the space out to a tenant - that income will provide a yield compared to what you paid the for the freehold (or long leasehold) of the commercial building.
There are myriad differences to a residential buy to let however. The leases tend to be longer; the tenants sometimes have more rights (in terms of compensation, right to renew) than a residential one, sometimes the tenant has to put the building back into the same condition they took occupation in (and there are surveyors that will act for you in order to agree compensation for these 'dilapidations').
Sometimes a unit can appear to be empty when it isn't (like the offices on the outskirts of Reading - Green park I think - that were empty for years yet the owner was receiving the rent agreed and signed prior to the decision by the tenant not to occupy....).
Sometimes you can re-optimise the space or achieve a different use-class through planning (office to residential being a classic case at the moment).
Sometimes you can re-gear the leases to a better rent or kick the current tenants out and then re-let the space for a better yield. Or perhaps you can re-let at the same rate but to a better covenant of tenant and increase the effective yield you could sell the unit at (or even better, up the rent and the tenant covenant and really supercharge the value of the property). By covenant I mean changing the tenant from Mrs Miggins pie shop business to Waitrose. People will pay more for an asset let to Waitrose than Mrs Miggins - simply because they think Waitrose will consistently pay and perhaps Miggins wont. So if Miggins is paying £12,000 a year and you put that asset in an auction - someone might apply a 7.5% yield to the rent (ie they'd multiply the rent by 13.33 (100 / 7.5) = £160,000 for the unit) but might apply a 4.5% yield if it was Waitrose (ie 22.22 times the annual rent - £266,000 for the same unit).
So companies buy commercial property to optimise the space and optimise the income to either increase the long term asset value and income for themselves or to sell on for a profit.
I could go on and on but more important - there are others on PH whom are far more commercial specialists than I am (english went a bit pear shaped there, sorry).
There are myriad differences to a residential buy to let however. The leases tend to be longer; the tenants sometimes have more rights (in terms of compensation, right to renew) than a residential one, sometimes the tenant has to put the building back into the same condition they took occupation in (and there are surveyors that will act for you in order to agree compensation for these 'dilapidations').
Sometimes a unit can appear to be empty when it isn't (like the offices on the outskirts of Reading - Green park I think - that were empty for years yet the owner was receiving the rent agreed and signed prior to the decision by the tenant not to occupy....).
Sometimes you can re-optimise the space or achieve a different use-class through planning (office to residential being a classic case at the moment).
Sometimes you can re-gear the leases to a better rent or kick the current tenants out and then re-let the space for a better yield. Or perhaps you can re-let at the same rate but to a better covenant of tenant and increase the effective yield you could sell the unit at (or even better, up the rent and the tenant covenant and really supercharge the value of the property). By covenant I mean changing the tenant from Mrs Miggins pie shop business to Waitrose. People will pay more for an asset let to Waitrose than Mrs Miggins - simply because they think Waitrose will consistently pay and perhaps Miggins wont. So if Miggins is paying £12,000 a year and you put that asset in an auction - someone might apply a 7.5% yield to the rent (ie they'd multiply the rent by 13.33 (100 / 7.5) = £160,000 for the unit) but might apply a 4.5% yield if it was Waitrose (ie 22.22 times the annual rent - £266,000 for the same unit).
So companies buy commercial property to optimise the space and optimise the income to either increase the long term asset value and income for themselves or to sell on for a profit.
I could go on and on but more important - there are others on PH whom are far more commercial specialists than I am (english went a bit pear shaped there, sorry).
In terms of the amount of space avaliable -it's probably the wrong type of space or the wrong class of space for the given area. Sometimes planners demand an 'active commercial' frontage even though it's patently clear to all that there isn't any demand for the commercial space in that area. Hence all the for sale boards or to let boards.
Why not just lower the price? Because buying land tends to be competitive so the developer needs to recoup a certain amount back for the commercial space.....
If any of that stuff is B1 office space - I'd seriously look at getting a change of use under PDR and changing it to residential.
Why not just lower the price? Because buying land tends to be competitive so the developer needs to recoup a certain amount back for the commercial space.....
If any of that stuff is B1 office space - I'd seriously look at getting a change of use under PDR and changing it to residential.
Oi_Oi_Savaloy said:
Why not out of interest?
the offices i know that are empty are on an "industrial/business" estate.Even getting a change of usage is a pain. Freehold mainly owned by uk land estates who seem unwilling to change. I can see their point as their property is to create jobs. That said the amount of empty units dotted around is amazing
Edited by 528Sport on Tuesday 19th April 17:09
If buying empty property you need to be careful, because you will get no return on your investment until you find a tenant, unless you can change its use, refurbish it and sell it on.
A small landlord may be able to get a better return on a commercial investment if they are personally managing it, if they reduce the rent to attract tenants etc. Indeed one of our clients specialises in buying struggling assets from a big investor, and then concentrating on them to get them let and income producing.
Lets say you have an office block which the valuer says should let for £100,000pa but you'll have to give a years rent free and it might take a year to let. By the end of year 5 you have been paid £300,000 in rent (yr 1 was vacant year 2 rent free). As a small investor you let it for £80,0000, with 9 months rent free but you let it immediately so yr 1 you get £20000 and then £80,000 for 4 years so you have earned £400,000 at which point you have a rent review which brings it up to full value. At the end of year 6 you will still be ahead and depending how rental values have changed the gap might be increasing. However at the end of year 5 the big investor will have rent review so after that tehy might start catching up, but it might be slow.
A small landlord may be able to get a better return on a commercial investment if they are personally managing it, if they reduce the rent to attract tenants etc. Indeed one of our clients specialises in buying struggling assets from a big investor, and then concentrating on them to get them let and income producing.
Lets say you have an office block which the valuer says should let for £100,000pa but you'll have to give a years rent free and it might take a year to let. By the end of year 5 you have been paid £300,000 in rent (yr 1 was vacant year 2 rent free). As a small investor you let it for £80,0000, with 9 months rent free but you let it immediately so yr 1 you get £20000 and then £80,000 for 4 years so you have earned £400,000 at which point you have a rent review which brings it up to full value. At the end of year 6 you will still be ahead and depending how rental values have changed the gap might be increasing. However at the end of year 5 the big investor will have rent review so after that tehy might start catching up, but it might be slow.
Oi_Oi_Savaloy said:
Why not just lower the price? Because buying land tends to be competitive so the developer needs to recoup a certain amount back for the commercial space.....
The reason was explained to me as they couldn't afford to reduce the asking price.If you build an office block that will rent for £500,000pa then that values the building at £10,000,000 (using an arbitrary return of 5%). As a developer, you'll borrow a bunch of money to buy the land and build the thing - let's say £5,000,000 loan - i.e. the lender has agreed they'll lend at 50% of the final value.
Now, if you advertise the property for £250,000pa then the value of the building has dropped to £5,000,000. The lender's criteria is that they will only lend 50% LTV so only £2,500,000 can be loaned against that building and someone has to cough up £2,500,000 for the lender.
When you take a view as an entire portfolio (other properties of differing sorts elsewhere) you're better to pay the interest on £5,000,000 (say £200,000pa at 4% rate) and wait for the market/demand to rise until it lets.
The above is obviously massively simplified and using numbers to make the maths easy but I think it demonstrates what I'm trying to say!!
The Moose said:
The reason was explained to me as they couldn't afford to reduce the asking price.
.. and more detail ..
Interesting - that's much the same as the reason I was given when I was asking about the number of empty shops in the centre of the local town. "Why don't they drop the rents, surely some income is better than none?" I asked. But pretty much what you said above was the reply, basically that money was borrowed against the value of the empty properties that would not be available if the value of those properties was reduced... and more detail ..
I've been in this game for a number of years and, in general, it's treated me well.
A factory site bought at a Welsh Development Agency auction for £90k in 1997 brought in £20kpa for 5 years before selling to the tenant for 3x the price paid.
Money was re-invested in 2 units at new business park (cost in region of £225k), also at auction, which has brought in a good income (52k pa), helped by long leases being signed to a single tenant in 2007 when rent was ~20% higher than today.
When let to good tenants, it's an easy game. Leases are self maintaining / insuring. I pay for the insurance and send on the bill to the tenant (could even add a service charge for doing so if I felt so inclined). The tenant is expected to maintain the property and hand back in the demised state.
However... say a tenant becomes insolvant. During this time they've converted 2500sq ft of office space into lab space or a production facility and divided a previously open plan 2500sq ft into smaller offices. You may hold 3 months rent as a deposit, but that's £12k vs the surveyor's estimate of £40k+ to put right. Quotes for carpeting alone are in excess of £10k. There are legal fees incurred during the surrender of the lease. The insolvency practitioner takes a good cut of what the tenant has left, leaving peanuts.
And now the offices are vacant. The landlord now has to pay the business rates, perhaps £18k per year. Then the £1500 insurance bill arrives and there is nobody to cross charge. Perhaps the economy has taken a downturn and the previous £50k pa rent looks more likely to be £40k (if lucky), with tenant wanting incentives such as a year free. At this point you'd be hard pushed to sell the two units for £300k in their current state when, annoyingly, they'd have probably taken around £500k at auction a couple of years back. Finally, being on pistonheads, every time you travel the 90 mile round trip to visit the site in your v8 super-car to speak with agents, surveyors, contractors, it costs £zillion in Optimax.
Whilst there are advantages in dealing with companies vs people (for residential BTL), and rewards can potentially be greater, commercial property has its own risks and headaches attached. Ulitmately there are more people who need to buy / rent homes than there are companies who need premises.
A factory site bought at a Welsh Development Agency auction for £90k in 1997 brought in £20kpa for 5 years before selling to the tenant for 3x the price paid.
Money was re-invested in 2 units at new business park (cost in region of £225k), also at auction, which has brought in a good income (52k pa), helped by long leases being signed to a single tenant in 2007 when rent was ~20% higher than today.
When let to good tenants, it's an easy game. Leases are self maintaining / insuring. I pay for the insurance and send on the bill to the tenant (could even add a service charge for doing so if I felt so inclined). The tenant is expected to maintain the property and hand back in the demised state.
However... say a tenant becomes insolvant. During this time they've converted 2500sq ft of office space into lab space or a production facility and divided a previously open plan 2500sq ft into smaller offices. You may hold 3 months rent as a deposit, but that's £12k vs the surveyor's estimate of £40k+ to put right. Quotes for carpeting alone are in excess of £10k. There are legal fees incurred during the surrender of the lease. The insolvency practitioner takes a good cut of what the tenant has left, leaving peanuts.
And now the offices are vacant. The landlord now has to pay the business rates, perhaps £18k per year. Then the £1500 insurance bill arrives and there is nobody to cross charge. Perhaps the economy has taken a downturn and the previous £50k pa rent looks more likely to be £40k (if lucky), with tenant wanting incentives such as a year free. At this point you'd be hard pushed to sell the two units for £300k in their current state when, annoyingly, they'd have probably taken around £500k at auction a couple of years back. Finally, being on pistonheads, every time you travel the 90 mile round trip to visit the site in your v8 super-car to speak with agents, surveyors, contractors, it costs £zillion in Optimax.
Whilst there are advantages in dealing with companies vs people (for residential BTL), and rewards can potentially be greater, commercial property has its own risks and headaches attached. Ulitmately there are more people who need to buy / rent homes than there are companies who need premises.
528Sport said:
Oi_Oi_Savaloy said:
Why not out of interest?
the offices i know that are empty are on an "industrial/business" estate.Even getting a change of usage is a pain. Freehold mainly owned by uk land estates who seem unwilling to change. I can see their point as their property is to create jobs. That said the amount of empty units dotted around is amazing
Edited by 528Sport on Tuesday 19th April 17:09
veevee said:
528Sport said:
Oi_Oi_Savaloy said:
Why not out of interest?
the offices i know that are empty are on an "industrial/business" estate.Even getting a change of usage is a pain. Freehold mainly owned by uk land estates who seem unwilling to change. I can see their point as their property is to create jobs. That said the amount of empty units dotted around is amazing
Edited by 528Sport on Tuesday 19th April 17:09
The trouble is - in many places at the moment even with so much B1 office space having been ripped out of the market (through change of use to resi) the facts are that at the moment residential developers will always outbid an office developer simply because their returns are greater.
I'd caveat that with the fact that in some parts of London (even some of the outlying boroughs) we're almost at parity, there's so little B1 office space available presently.
I'm not sure where you're based poorcardealer (forgot to look prior to posting!) but there might be an angle for you (if so inclined) to buy and build an office......
Or perhaps not!
I'd caveat that with the fact that in some parts of London (even some of the outlying boroughs) we're almost at parity, there's so little B1 office space available presently.
I'm not sure where you're based poorcardealer (forgot to look prior to posting!) but there might be an angle for you (if so inclined) to buy and build an office......
Or perhaps not!Oi_Oi_Savaloy said:
The trouble is - in many places at the moment even with so much B1 office space having been ripped out of the market (through change of use to resi) the facts are that at the moment residential developers will always outbid an office developer simply because their returns are greater.
I'd caveat that with the fact that in some parts of London (even some of the outlying boroughs) we're almost at parity, there's so little B1 office space available presently.
I'm not sure where you're based poorcardealer (forgot to look prior to posting!) but there might be an angle for you (if so inclined) to buy and build an office...... Or perhaps not!
We are in west yorkshire, I am sat on a piece of land at the minute which a developer agreed to purchase from me along with adjacent land to put houses on for a housing association..was around the time the banks went bad and they pulled out of the deal with the developer..I have spoken to planning regarding putting a few small units on it, they are sayong they would prefer a housing development, however nothing has been done since 2008 and with nothing in the pipeline im thinking of putting an application in and going from there...I'd caveat that with the fact that in some parts of London (even some of the outlying boroughs) we're almost at parity, there's so little B1 office space available presently.
I'm not sure where you're based poorcardealer (forgot to look prior to posting!) but there might be an angle for you (if so inclined) to buy and build an office......
Or perhaps not!POORCARDEALER said:
Small units in the 100-150 a week mould are in very short supply in my area,particuallysomething clean and modern, only ones available are in old victorian mills,almost impossible to heat, and even those are hard to find.
I was about to say it's the same in my area, then I realised we are in the same area!! There's a shortage of decent small industrial units, just let a 1500 sq ft unit and could have let it 6-7 times over.
Retail units going well, offices still struggling, however the start of 2016 has been the busiest since the crash.
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