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Commercial Property Investments: avoiding the pitfalls

Mon 9 December 2019

Good quality commercial property investments are often hard to find in the current market with many investors looking to delay selling until there is more clarity regarding the current political climate. This is causing potential purchasers of commercial property investments to look at the secondary market and/or unfamiliar property types. Purchasers need to take appropriate and professional advice as well as being aware of the pitfalls in acquiring investments to reduce their risk profile.

Over-rented Properties

Don’t assume that the passing rent is a fair reflection of the market rent of the property; this has been particularly important in the retail market where there has been a downward pressure on rents over recent years. In some cases, the gap between the passing rent and the market rent could be significant and if the property was to become vacant, or if the lease were renewed, the rent could fall significantly.

This factor is not limited to retail properties though. Sale and lease back situations, where a vendor remains in a property under a lease, can also be prone to being over rented.

Any property can be over rented no matter what that sector; an investor should take advice on the purchase price of a property but also take advice on the market rent and how this compares to the passing rent. This analysis may also identify that a property is in fact under rented, with scope for rent increases at review or lease renewal which could help the investment perform better than first anticipated.

Minimum Energy Efficiency Standards (MEES)

As most investors will be aware, it is now illegal to let or renew a lease on a property which has an Energy Performance Certificate (EPC) rating of F or G. However, from April 2023 the legislation will apply to all active leases, therefore, for a commercial property to continue to be let, it must have an EPC rating of E or above.

The government are currently consulting on further changes proposed for 2030. The latest soundings on this is that they will extend the legislation with effect from April 2030 to also effectively ban the letting of properties with EPC ratings of D and E; there is even some talk of properties within band C also falling within the legislation, although this seems less likely at this stage. 

The new legislation will have a significant impact on the property industry, and it is imperative that existing owners and investors take the appropriate advice on both the acquisition of new properties and the adaptation of existing properties so that they comply with current and proposed legislation.

Look to the future

Whilst we cannot predict the future, we can try to minimise the impact or potential changes to a property and/or the market. For instance, if a tenant failed, how easy is the property to re-let?  If the property was vacant for a time, what would the holding costs be?

For those already owning commercial investments, keep track of your tenant through active property management. Obtain the tenants annual accounts, if possible, and make sure that they are continuing to trade well. On a more practical note, have your management surveyor inspect the property regularly as they will often be able to identify changes which might give cause for concern.

Properties with other potential uses also present opportunity and reduce the risk profile of the investment as well as possibly enhancing the return on the investment. Property must constantly evolve to changes in the market and government policy and owners must ensure they take appropriate advice to reduce risk and maximise return.

The youngsRPS commercial property team are very experienced in buying, selling and managing properties across a variety of sectors. Whether you are looking to invest in commercial property, sell your commercial property investments or want to ensure your portfolio is actively managed we are happy to discuss your needs. Give the team a call on 0191 261 0300.