Commercial property ROI

[BoRED S2upid]

Is there a rule of thumb what a decent % return for a commercial property would be?

I’ve been in BTL for decades and have always thought between 5and 10% is a decent return but have no idea about commercial property.

It’s a shop with a well established food business if that makes any difference.

[HoHoHo]

I guess that must depend on individual circumstances.

If you own it and run your business from a building the ROI (could) be higher than if you rented it out......

In my experience 7% is pretty good but again that may depend on type of unit/office and of course location?

This is coming from an owner of three buildings on their own mini trading estate.

Personally I’ve never understood why more business owners don’t push themselves to buy a suitable building - it’s a bit of a no brainier surely?

[BoRED S2upid]

HoHoHo said:

I guess that must depend on individual circumstances.

If you own it and run your business from a building the ROI (could) be higher than if you rented it out......

In my experience 7% is pretty good but again that may depend on type of unit/office and of course location?

This is coming from an owner of three buildings on their own mini trading estate.

Personally I’ve never understood why more business owners don’t push themselves to buy a suitable building - it’s a bit of a no brainier surely?

Shhh don’t tell them that 😉 this purchase would be just the unit with the business unaffected and paying a considerable amount of rent.

I imagine they can’t afford the deposit to buy a commercial property which if why most business don’t. I understand deposits can be a lot higher than a BTL 25%?

[covmutley]

Someone with actual relevant experience will no doubt be along soon, but fwiw my understanding is that it's very much dependent on the type, the occupier and length of any lease.

Yields on a shop on oxford street are low (3%?), but you may get a very long lease agreement. Similar for a doctors surgery where the NHS are paying, almost guaranteeing, the rent. Low risk, so lower yield.

https://content.knightfrank.com/research/522/docum...

Edited by covmutley on Thursday 9th January 15:40

[Mr Moley]

Anywhere between 3-15% net depending on the amount of risk you are taking (lease length, covenant, location, sector etc etc)

[BoRED S2upid]

Thanks guys. This one has a secured 5 year lease and is up around the 12% mark depending on what it actually sells for.

[jonny70]

BoRED S2upid said:

Thanks guys. This one has a secured 5 year lease and is up around the 12% mark depending on what it actually sells for.

Are there any vacant units in the shopping area/vicinity?
If the tenant leaves after 5 years how easy will it be to relet the shop?
How much are business rates? (Landlord is responsible 3 months after it being vacant)

[BoRED S2upid]

jonny70 said:

BoRED S2upid said:

Thanks guys. This one has a secured 5 year lease and is up around the 12% mark depending on what it actually sells for.

Are there any vacant units in the shopping area/vicinity?
If the tenant leaves after 5 years how easy will it be to relet the shop?
How much are business rates? (Landlord is responsible 3 months after it being vacant)

No vacant units within 2 miles, has changed use / owner 3 times in 20 years I think it probably took a few months between let’s but nothing significant. I think it benefits from small business rates relief but I will check this out as I wasn’t totally sure about who pays that ( I had an idea they would come to the landlord).

Thanks for the response much appreciated.

[TheSurveyor]

As the name suggests this is what I do, although not retail (thankfully?!).

All depends on the area of the country, demographic and whether the banks will lend on a retail scheme.

Industrial units are always my preferred as always a good market to relet should a tenant go pop, which I wouldn't (broadly) attribute to retail at the moment.

[soxboy]

I too am in this area (commercial property valuation is my core line of work).

There is no hard and fast rule on yields, as others have said it very much depends on the length of lease, the strength of the covenant and the location.

As a retail unit, we have all seen the stories lately on the strength of the 'High Street', with some performing badly and others ok. I wouldn't be put off from investing in a retail unit, however I would take a look not only at how long is on the lease, but also how long the tenant has been in occupation and how well the rent compares with others nearby (as a quick guide, look at the rateable values).

There is stronger demand for investments that are smaller lot sizes (>£200,000), we work off 10% at the moment which makes valuation calculations a lot easier!

Have regard to what may happen if the tenant were to vacate - how many vacant units are there in the locality? Will it attract 100% small business rate relief? Would it appeal to owner-occupiers? (due to shortage of freeholds, we are seeing shops with vacant possession that are smaller lot sizes are achieving higher values than investments).

If you are a residential LL, when comparing yields it is also worth looking at the repairing obligations on the lease, with most tenants either directly responsible for repairs or covenanted to reimburse the landlord with the cost of repairs.

If the unit comes vacant do bear in mind that you as landlord will be liable for paying empty rates after 3 months grace period.

[classicaholic]

I tried to buy our unit for the last 20 years but the owner wouldn't sell, I probably wouldn't sell either if I had a long term tenant that had a lot of fixed machinery in there, I think he has me by the short & Curlys!

[jonny70]

BoRED S2upid said:

No vacant units within 2 miles, has changed use / owner 3 times in 20 years I think it probably took a few months between let’s but nothing significant. I think it benefits from small business rates relief but I will check this out as I wasn’t totally sure about who pays that ( I had an idea they would come to the landlord).

Thanks for the response much appreciated.

Most likely the small business will be exempt from rates.
You can check the business rates online.

Are you planning on taking a mortgage? It can be more difficult to get a commercial mortgage than a standard BTL mortgage and the deposit required is larger 30-40%.

[HoHoHo]

jonny70 said:

Are you planning on taking a mortgage? It can be more difficult to get a commercial mortgage than a standard BTL mortgage and the deposit required is larger 30-40%.

That's correct albeit it never used to be - when I bought my three buildings 10% was the norm which makes life easier in the SE where prices can be a lot higher than some parts of the UK.

Now I'm mortgage free running my business from them and it's easy (taxable) money with no outlay whatsoever from my side as my business is responsible for upkeep and modernisation so it's a win-win situation.

Don't forget you can used your pension as a deposit if you have sufficient in the funds.

[BoRED S2upid]

jonny70 said:

Most likely the small business will be exempt from rates.
You can check the business rates online.

Are you planning on taking a mortgage? It can be more difficult to get a commercial mortgage than a standard BTL mortgage and the deposit required is larger 30-40%.

There will be a mortgage required 30-40 is a little painful I must admit. I’m speaking to some lenders let’s hope it’s 30 or less and not 40!

[Chamon_Lee]

Currently looking myself and work on the basis of 10% minimum.

From checking with lenders 40% deposit is more the norm rather than 30%. Again many variables come into it: type of property, length of lease, remaining period etc etc

[BoRED S2upid]

HoHoHo said:

That's correct albeit it never used to be - when I bought my three buildings 10% was the norm which makes life easier in the SE where prices can be a lot higher than some parts of the UK.

Now I'm mortgage free running my business from them and it's easy (taxable) money with no outlay whatsoever from my side as my business is responsible for upkeep and modernisation so it's a win-win situation.

Don't forget you can used your pension as a deposit if you have sufficient in the funds.

Can you elaborate on the pension as a deposit? We have various pension pots but are early 40’s so couldn’t access them or would want to. Only 1 pot is a private one the others are company scheme and still being paid into naturally.

[soxboy]

BoRED S2upid said:

HoHoHo said:

That's correct albeit it never used to be - when I bought my three buildings 10% was the norm which makes life easier in the SE where prices can be a lot higher than some parts of the UK.

Now I'm mortgage free running my business from them and it's easy (taxable) money with no outlay whatsoever from my side as my business is responsible for upkeep and modernisation so it's a win-win situation.

Don't forget you can used your pension as a deposit if you have sufficient in the funds.

Can you elaborate on the pension as a deposit? We have various pension pots but are early 40’s so couldn’t access them or would want to. Only 1 pot is a private one the others are company scheme and still being paid into naturally.

You transfer the pot into a SIPP and use that towards the property, however there are limits on what proportion of your pot you can borrow against. I think you can only borrow 50% of the value of the pot.

[anonymous-user]

The investors I aim to source and acquire commercial property for are typically looking for net yields of around 10%.

More commonly I see investment premises being marketed at around 4-7% NY. This is down in Hampshire and as mentioned varies dependant on sector and a multitude of other variables.

[soxboy]

I would add that if buying through a pension, I often find that pension funds administrators have unrealistic expectations about lease terms eg demanding minimum lease of 5 years, plus administrative costs can be significant.

[BoRED S2upid]

soxboy said:

I would add that if buying through a pension, I often find that pension funds administrators have unrealistic expectations about lease terms eg demanding minimum lease of 5 years, plus administrative costs can be significant.

I’m sure they would be significant. It doesn’t sound like an easy buy! We will see what the lenders think next week.

Thanks for all your responses.