Written by Michael Blake, Director
Many private investors have dipped their toe in the residential buy-to-let market. Some consider putting their money into commercial property as a way of spreading risk across their portfolio.
Commercial property can often offer a lower cost alternative to residential investment. It can also offer more security, as typical lease lengths are between 5-10 years, much longer than you would get from a residential property, where tenancies of six months or a year are more typical.
Investing your money in commercial property isn’t all plain sailing however; it isn’t just a question of paying over the money and collecting the rent every quarter. Depending on which sector the property is in (retail, office, industrial, etc.) and the quality and location of the building, an investor in a commercial property should anticipate net rental returns of typically between 5 per cent and 10 per cent per annum.
To maintain this level of return however, your investment has to be actively managed. This isn’t just about making sure the rent is paid on time and ensuring the fabric of the building is well looked after. There is a lot more to holding commercial property than might at first meet the eye.
Clearly the collection of rent and insurance, and for multi-tenanted commercial properties, service charge, is vitally important. An investor should attempt to create a good relationship with its tenant, and maintain regular contact. Such connections should help the investor landlord identify at an early stage signs that a business tenant is not performing so well and who might be at risk of at best: paying rent late, or at worst: not at all.
Especially for single tenanted properties, modern commercial leases are typically drawn upon a full repairing basis where the liability for repair of the whole building lies with the tenant.
In multitenanted buildings, there is often a service charge payable by the tenants to enable the landlord to recover costs of repair to shared and external parts of the building.
It is vital to ensure that your investment is kept in good repair. This should not be limited to reacting to minor damage or a leak. Consideration should be given to planned maintenance to take proactive action to hopefully reduce costs of repair in the future. A commercial landlord can work with a tenant who has a full repairing lease, to ensure there is a programme of planned work, and that this is implemented. A commercial landlord will also need to ensure the building complies with all relevant health & safety and fire safety legislation. This might be down to the tenant, but it still needs to be done.
An investor might decide to undertake this management work, or alternatively place it in the hands of a property manager. Where the property manager is a member of the Royal Institution of Chartered Surveyors (RICS), they will be required to comply with the RICS member’s Accounts Regulations which govern how surveyors handle clients’ money. RICS also provides detailed guidance notes to surveyors on how properties are to be managed. RICS members’ must adhere to this guidance.
The managing agent will also be able to advise on rent reviews and lease renewals, seeking to maximise returns, whilst still maintaining a level of rent which is sustainable for the tenant. In certain sectors of the market, and in times of economic decline, it might be more important for the landlord to retain a tenant, even at a lower rent, to avoid the prospect of a vacant property and all the costs associated with that, such as insurance, repairs, empty business rates, security and added professional fees, as well as the loss of rental income of course.
When a lease end or tenant break approaches, one way of reducing the risk of voids and for increasing capital value, is to attempt to restructure a lease, agreeing terms for the early surrender of the lease on the simultaneous grant of a new lease for a longer term, perhaps converting a one year certain into five years. The tenant may be happy to go along with this to benefit from the added security.
Here at YoungsRPS, our surveyors have a long history of managing commercial property assets for a wide range of property investors from private individuals through investment companies to major charitable investment trusts.
If you are considering making an investment in commercial property or wish to appoint a property manager to look after your commercial property investment, please contact a member of the YoungsRPS team.
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