Any commercial property investors here?
Discussion
Assuming you had the finances but not the properties; are there any PH'ers in commercial property who would consider putting their hard-earned into first time investments in 2021?
The advantages I like for commercial are:
- FIR leases give you a less hassle than residential
- Easier to regain control of the property from non-paying tenants
- Upward only rent reviews
- Once tenanted with a long term tenant on an FIR, it's a very easy and truly passive investment compared to most (other than index funds/bonds)?
Downsides would be:
- Brexit/Covid might kill off most of the high street and office buildings. Maybe secondary/tertiary buildings or warehouses might be better?
- Capital appreciation is not as good as in residential. I've heard in some markets it's virtually nil?
- Harder to buy and harder to sell than residential
- Harder to find tenants than residential. The value of commercial is tied up in the lease.
- Less finance available than in residential.
But assuming you had the money, would you still consider it over other investments?
The advantages I like for commercial are:
- FIR leases give you a less hassle than residential
- Easier to regain control of the property from non-paying tenants
- Upward only rent reviews
- Once tenanted with a long term tenant on an FIR, it's a very easy and truly passive investment compared to most (other than index funds/bonds)?
Downsides would be:
- Brexit/Covid might kill off most of the high street and office buildings. Maybe secondary/tertiary buildings or warehouses might be better?
- Capital appreciation is not as good as in residential. I've heard in some markets it's virtually nil?
- Harder to buy and harder to sell than residential
- Harder to find tenants than residential. The value of commercial is tied up in the lease.
- Less finance available than in residential.
But assuming you had the money, would you still consider it over other investments?
Good investment if you can find the right type of location/tenant.
I wouldn’t describe it as being ‘very easy’ and also not passive like an index tracker. But I do see what you mean about it being a relatively hands off investment.
Add to cons list business rates liability when the property is unoccupied.
Also upward only rent reviews are not a given, more tenants are seeking a OMV rent reviews.
Lot of overpriced property out there too on rents which do not reflect market value. If there’s a short term left on the lease value the property at today’s market rent not the passing rent, the likelihood is the rent will be coming down when the new lease is granted.
Quite a few landlords are aware of this and are selling up based on valuation at passing rents.
I wouldn’t describe it as being ‘very easy’ and also not passive like an index tracker. But I do see what you mean about it being a relatively hands off investment.
Add to cons list business rates liability when the property is unoccupied.
Also upward only rent reviews are not a given, more tenants are seeking a OMV rent reviews.
Lot of overpriced property out there too on rents which do not reflect market value. If there’s a short term left on the lease value the property at today’s market rent not the passing rent, the likelihood is the rent will be coming down when the new lease is granted.
Quite a few landlords are aware of this and are selling up based on valuation at passing rents.
ATV said:
Downsides would be:
- Brexit/Covid might kill off most of the high street and office buildings. Maybe secondary/tertiary buildings or warehouses might be better?
- Capital appreciation is not as good as in residential. I've heard in some markets it's virtually nil?
- Harder to buy and harder to sell than residential
- Harder to find tenants than residential. The value of commercial is tied up in the lease.
- Less finance available than in residential.
But assuming you had the money, would you still consider it over other investments?
Don’t forget:- Brexit/Covid might kill off most of the high street and office buildings. Maybe secondary/tertiary buildings or warehouses might be better?
- Capital appreciation is not as good as in residential. I've heard in some markets it's virtually nil?
- Harder to buy and harder to sell than residential
- Harder to find tenants than residential. The value of commercial is tied up in the lease.
- Less finance available than in residential.
But assuming you had the money, would you still consider it over other investments?
1) Rent free incentives and the impact these have on cash flow.
2) Greater concentration (unless you’re looking at larger portfolio of small units).
3) Empty properties can sit vacant for quite some time if the type of unit or market is against you.
ATV said:
But assuming you had the money, would you still consider it over other investments?
As an asset class, yes.As an asset to buy in your SIPP to lease to your LtdCo if applicable, yes.
As a highly illiquid asset to buy directly, rather than buying indirectly and enjoying the many benefits of a REIT, no.
sideways sid said:
ATV said:
But assuming you had the money, would you still consider it over other investments?
As an asset class, yes.As an asset to buy in your SIPP to lease to your LtdCo if applicable, yes.
As a highly illiquid asset to buy directly, rather than buying indirectly and enjoying the many benefits of a REIT, no.
I have residential - houses and flats and we also bought our own office space 6 years ago. Commercial does look appealing for some of the reasons you list, however I think offices and shops are high risk potentially going forward. Hotels look good currently and owning both property and a smallish travel company is something we're looking at, prices are far down on pre Covid levels, but in the medium term look very attractive investments.
I have experience with:
Commercial - several ~2000sq ft office buildings in 'sought after' business park. Long term leases are awesome - aside from insuring and invoicing there's little to do. However insolvencies, dilapidation and vacant periods can be hard work as well as expensive. Also likely to be opted for VAT which adds to accounting burden (though has some advantages). As the units have become vacant I've listed them for lease or sale and have gradually exited the portfolio. In recent years these properties would be £21k pa rent yet sold for around £250k each. At the time I got into this, it was more commonly sale price = 7x annual lease, so no longer as lucrative, yet still beats other property classes. My main bugbear was paying business rates (about £1k pm), utilities and insurance on empty units.
Residential BTL - have had long term tenants in my 2 properties. Generally look after the houses and treat like their own. Use a managed service who take 7% + VAT but act as 'reception' for the inbound queries. Selected the type of property / location where I'd happily live myself ~15 years ago, which may not be as profitable but easy to let out and maybe useful for kids one day. They have benefitted from significant property price rise.
Holiday let - moved into this asset class with a view to becoming a trading business. Started with an awesome place in a popular seaside resort. Use a 'local' firm for the peak season and dabble with airbnb to fill some voids off season. Profits have gone back into upgrades and it's been great to use ourselves whilst our usual foreign holidays have been cancelled due to pandemic. In time it will probably become more profitable than BTL, but also more stressful... small problems can 'ruin' holidays and at 100 miles away, I'm reliant on local contacts to put things right quickly. It's difficult to get maintenance done and anything major-ish means taking it off market for a week or so (though can use ourselves during this time). It's also expensive - the local cleaners and trades add their own 'holiday let tax' to take their share of the profits.
Has also benefitted from sharp property price rise. My plan is to buy another with the cash that's accumulating in this business but I'm hesitant with the stress factor. If I lived more locally I'd be much more enthusiastic about a second.
Commercial - several ~2000sq ft office buildings in 'sought after' business park. Long term leases are awesome - aside from insuring and invoicing there's little to do. However insolvencies, dilapidation and vacant periods can be hard work as well as expensive. Also likely to be opted for VAT which adds to accounting burden (though has some advantages). As the units have become vacant I've listed them for lease or sale and have gradually exited the portfolio. In recent years these properties would be £21k pa rent yet sold for around £250k each. At the time I got into this, it was more commonly sale price = 7x annual lease, so no longer as lucrative, yet still beats other property classes. My main bugbear was paying business rates (about £1k pm), utilities and insurance on empty units.
Residential BTL - have had long term tenants in my 2 properties. Generally look after the houses and treat like their own. Use a managed service who take 7% + VAT but act as 'reception' for the inbound queries. Selected the type of property / location where I'd happily live myself ~15 years ago, which may not be as profitable but easy to let out and maybe useful for kids one day. They have benefitted from significant property price rise.
Holiday let - moved into this asset class with a view to becoming a trading business. Started with an awesome place in a popular seaside resort. Use a 'local' firm for the peak season and dabble with airbnb to fill some voids off season. Profits have gone back into upgrades and it's been great to use ourselves whilst our usual foreign holidays have been cancelled due to pandemic. In time it will probably become more profitable than BTL, but also more stressful... small problems can 'ruin' holidays and at 100 miles away, I'm reliant on local contacts to put things right quickly. It's difficult to get maintenance done and anything major-ish means taking it off market for a week or so (though can use ourselves during this time). It's also expensive - the local cleaners and trades add their own 'holiday let tax' to take their share of the profits.
Has also benefitted from sharp property price rise. My plan is to buy another with the cash that's accumulating in this business but I'm hesitant with the stress factor. If I lived more locally I'd be much more enthusiastic about a second.
Personally I wouldn’t just own one commercial property as there are significant downside risks which are greater than in residential property...you can definitely have much longer void periods, rent free periods for new tenants and if you happen to be in the wrong sector over time the value can become severely impaired. You need diversity in my opinion.
I managed a portfolio of distressed real estate for a few years (not in the UK) which had a wide variety of commercial and residential assets in it. Commercial property can be very difficult to lease if it is not to the right spec/size/location and can also become dated and require serious Capex.
As an example one building we owned was the former headquarters a clothing retailer. Had a relatively large amount of office space as well as warehouse space. From recollection the split was something like 30% office to 70% warehouse. That along made it difficult as most companies looking in that location wanted a larger proportion of warehouse space. Then because of what was being made in the factory (clothes) the access was designed around smaller lorries....so it wasn’t big enough for articulated lorries to use easily....so that was another problem. Building was only about ten years old in decent condition but was very hard to lease.
I managed a portfolio of distressed real estate for a few years (not in the UK) which had a wide variety of commercial and residential assets in it. Commercial property can be very difficult to lease if it is not to the right spec/size/location and can also become dated and require serious Capex.
As an example one building we owned was the former headquarters a clothing retailer. Had a relatively large amount of office space as well as warehouse space. From recollection the split was something like 30% office to 70% warehouse. That along made it difficult as most companies looking in that location wanted a larger proportion of warehouse space. Then because of what was being made in the factory (clothes) the access was designed around smaller lorries....so it wasn’t big enough for articulated lorries to use easily....so that was another problem. Building was only about ten years old in decent condition but was very hard to lease.
I’ve got an industrial unit in my pension, worked well while it was occupied by my business, the current tenant has struggled during COVID, to be honest it’s been too much hassle (managing agents CBRE have been poor), so I’ve decided to sell, the upside is prices and demand are strong so should sell quickly.
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