According to specialist mortgage broker Commercial Trust, a commercial property is \u201cone that a business operates from.\u201d<\/p>\n\n\n\n
It lists the five main types of commercial property as follows:<\/p>\n\n\n\n
- \n
- Offices – used for professional, commercial or bureaucratic work<\/li>\n\n\n\n
- Retail – comprises shopping centres, supermarkets and retail stores<\/li>\n\n\n\n
- Industrial – consist of warehouses and factories<\/li>\n\n\n\n
- Leisure \u2013 restaurants, pubs, cafes, hotels and sports facilities<\/li>\n\n\n\n
- Healthcare \u2013 hospitals, nursing homes, or specialist clinics<\/li>\n<\/ol>\n\n\n\n
Under the UK\u2019s planning system, all properties are divided up into different use classes and a change of use normally requires permission from the local planning authority. \u201cThe main reasons why commercial properties have different types of class in place is to make sure that a given geographic area does not include too many of the same type of property, such as too many pubs, and to determine which type of business can move into a property,\u201d says Commercial Trust.<\/p>\n\n\n\n
Clifton Private Finance adds: \u201cWhen you purchase a commercial property, it is essential that you buy the property that fits your company need – a warehouse cannot be used as an office, and a pub is not a factory. While changing a property class is possible, it requires planning permission from the council, which can be denied. Buying a property without the right class or planning permission in place can be an extremely costly mistake.\u201d<\/p>\n\n\n\n
What are the advantages and disadvantages of buying a commercial property?<\/strong><\/h2>\n\n\n\n
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<\/figure>\n\n\n\nPeople typically buy commercial property either for use by their own business or to rent out to other businesses as an investment. In the case of the former, owning the property provides you with a significant investment for the future, provides you with full control of the property and gives you the option to turn the property into a profit-making asset in the future, according to Clifton.<\/p>\n\n\n\n
\u201cFor many businesses, the choice between purchasing property and renting it has a lot to do with the stage of the business, with startups leaning heavily towards leasing and more established businesses enjoying the financial and managerial power to buy,\u201d the company says. \u201cThis is not always the case, however, with many new businesses considering a property purchase as part of their initial business plan, and similarly, a significant number of well-established businesses preferring to be out of the property market.\u201d<\/p>\n\n\n\n
Clifton adds that a perceived disadvantage of commercial property leasing is that an occupier is beholden to their landlord when it comes to making alterations and so on. \u201cHowever, this is usually untrue, with the property owner more than happy to have their tenants make significant improvements and changes to the building while they are using it,\u201d it says.<\/p>\n\n\n\n
\u201cOf course, this does mean that often tenant businesses are ploughing their own capital into a property for the long-term benefit of the landlord. Indeed, this latter consideration is often the drive for many businesses to consider property ownership.\u201d<\/p>\n\n\n\n
When it comes to buying a commercial building as an investment, buyers typically purchase a property either to hold it in the long term and create a revenue stream from the rent or to improve the building and sell it on for a profit.<\/p>\n\n\n\n
\u201cThough in theory, these proposals are similar to those in the residential market, commercial property is a riskier investment, with the potential for higher profits alongside more complex rental and resale markets,\u201d says Clifton. \u201cResearch and due diligence are essential for successful commercial property investment.\u201d <\/p>\n\n\n\n
\u2018Location, location, location\u2019<\/strong><\/h2>\n\n\n\n
It is a cliche, but location is just as important when it comes to commercial property as it is for residential. \u201cMy number one is location, location, location,\u201d says Josh Phegan, a motivational speaker and educator specialising in real estate. \u201cThis never goes away and this is [about] looking at future infrastructure and what’s going to be happening in and around a particular area in terms of population trends.\u201d<\/p>\n\n\n\n
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<\/figure>\n\n\n\nIf, for instance, an area is set to benefit from new transport links, it can be expected that footfall will increase significantly. \u201cDepending on what it is that you’re actually looking to buy, it is really important to think about the location, particularly around transport hubs,\u201d says Phegan. \u201cAll sorts of things are going to impact on the future saleable value and, naturally, the future rentable value of a particular property.\u201d<\/p>\n\n\n\n
Clifton adds: \u201cSelecting the wrong location for your commercial property can be a devastating and extremely costly mistake that can have an impact on your business growth for years. It is well worth seeking professional advice regarding the location and researching any factors that are of specific importance to your company.\u201d<\/p>\n\n\n\n
Finding the right property<\/strong><\/h2>\n\n\n\n
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<\/figure>\n\n\n\nOnce a business has decided on a location, it can begin to focus on individual properties. An initial search can be done on Rightmove\u2019s commercial property platform<\/a>. The site lists many thousands of properties and allows users to refine their search in multiple different ways, including by size, price and the type of commercial property required.<\/p>\n\n\n\n
It may also be that companies choose to use an agent even at this early stage to help with initial research and due diligence. Not only do commercial agents have intimate knowledge of their \u2018patch\u2019, they also have years of experience of advising clients on their property requirements and will be able to manage expectations on what is realistic within any given budget.<\/p>\n\n\n\n
Many commercial agents will be members of the Royal Institution of Chartered Surveyors<\/a> (RICS) or Propertymark<\/a>. This means they are regulated and adhere to strict rules on conduct and continuing professional development.<\/p>\n\n\n\n
Understand what you’ll be able to do with a property<\/strong><\/h2>\n\n\n\n
A property may look ripe for repurposing, but this isn\u2019t always straightforward. Potential purchasers need to understand what they will be allowed to change and, in all likelihood, will require professional advice from, for instance, a planning consultant. \u201cHow long is it going to take to get any future plans through the council and how long will it take to redevelop that particular site over time?\u201d Asks Phegan.<\/p>\n\n\n\n
\u201cThis is always [about] betting against what’s actually happening [in the] market, what’s happening to interest rates, what’s happening to industry trends, what’s actually happening to return expectations of future investors that could go to buy that particular property that you’re going to be taking to market in time. If you’re unable to do the development, are you able to hold that property over the long term?\u201d<\/p>\n\n\n\n
Consider the future of the market<\/strong><\/h2>\n\n\n\n
Whatever commercial sector a buyer is considering, it is important to think about how occupiers are likely to fair over time as this will obviously have implications for both rental and capital values. \u201cWhere do you see the future of the industry going?\u201d asks Phegan. \u201cWhat types of properties are going to be really in demand?”<\/p>\n\n\n\n
He adds: \u201cWhat we have learned over a period of time is there are certain asset classes that do well for a very long period of time. There are other asset classes that need incredible amounts of renewal in order to bring them back to speed for what the expectations of future tenants will actually be. The future of a property is all about understanding that you could actually have it as a great asset for 20 years, and then in the 20th year, move to redevelopment of that particular site.\u201d<\/p>\n\n\n\n
What are the funding options?<\/strong><\/h2>\n\n\n\n
The majority of buyers do not have the cash in the bank required to purchase a commercial property outright and will need to consider some sort of financing arrangement. \u201cCommercial mortgages are the most common funding option for buying a commercial property,\u201d according to Commercial Trust.<\/p>\n\n\n\n
\u201cCommercial mortgages effectively work similarly to residential mortgages, as you have to pay the deposit first, and afterwards, you make monthly payments. With a commercial mortgage, these can be either capital and interest or interest-only. It is possible to borrow long-term, as terms typically go up to 25 years. Your age at the end of the term may affect how long you can take out a commercial mortgage.\u201d<\/p>\n\n\n\n
In addition, it is important to understand that there are two different types of commercial mortgage depending on whether you intend to use a property for your own business use (owner-occupier commercial mortgage) or rent it out to another business (commercial investment mortgage). \u201cEnsuring you get the right product for your circumstances is imperative,\u201d says Commercial Trust.<\/p>\n\n\n\n
In the right circumstances, buyers may want to consider other options, such as a bridging loan, which are typically short-term and fast to arrange. \u201cIt\u2019s a financing method that enables you to buy a commercial property before long-term funding is arranged or cash becomes available,\u201d according to Commercial Trust.<\/p>\n\n\n\n
\u201cBridging loans for property developers allows those who need to renovate a property before it can be mortgaged to bridge the financial gap between doing work on the property and exiting long-term finance, or between one property transaction and another. Bridging is a viable option if you need to purchase a property and convert it to commercial, where work needs to be done to it or where completion deadlines are short.\u201d<\/p>\n\n\n\n
Auction finance may also be a possibility. This allows a buyer to complete a transaction at an auction, normally using a pre-arranged bridging loan that enables you to pay in full within the normal 28-day period following the fall of the hammer. \u201cBy arranging funds before the auction, you will know that you can definitely secure funding, what your exact budget is when bidding and what property specification your lender will finance,\u201d says Commercial Trust. \u201cRemember, though, the loan cannot be used to pay the deposit and fees. You will need your own funds for this.\u201d<\/p>\n\n\n\n
The need for professional advice<\/strong><\/h2>\n\n\n\n
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<\/figure>\n\n\n\nAccording to Phoenix and Partners, buyers are well-advised to seek professional advice from multiple parties. \u201cCommercial real estate is a complex legal domain,\u201d it says. \u201cProfessional insight is an absolute must. There is simply no way that you can take on a commercial investment project without the assistance of solicitors and surveyors at least.\u201d<\/p>\n\n\n\n
It adds: \u201cOn the financial side, it\u2019s certainly wise to liaise with an independent financial advisor when it comes to comparing financing options. When you delve into financing like bridging loans then there\u2019ll be more options and risks to weigh up. It\u2019s hard to account for investment risk without performing a rigorous economic analysis of the target asset.\u201d<\/p>\n\n\n\n
Enlisting a RICS Chartered Surveyor is also crucial for the due diligence process, says Phoenix. \u201cYour survey may alter the perception of the building, especially if major structural flaws are discovered. This could enable you to save vast quantities of money, or even save your property from catastrophic issues down the line.\u201d<\/p>\n\n\n\n
How are purchases structured?<\/strong><\/h2>\n\n\n\n
Once you have decided on a property, the actual purchase process becomes rather more formal and requires professional advice on multiple fronts. Firstly, the purchase price must be properly agreed with the seller, which is typically done through a commercial agent. \u201cThe agent would then prepare a memorandum of sale, which sets out the main points of transaction,\u201d says Commercial Trust. \u201cEven though it is not legally binding, it is usually referred to for legal drafting and should be accurate.\u201d<\/p>\n\n\n\n
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<\/figure>\n\n\n\nNext, solicitors need to be officially instructed. \u201cYour solicitor will send their terms of business and ask for your identification documents and they may ask for money on account for property searches and land registry documents,\u201d advises Commercial Trust.<\/p>\n\n\n\n
\u201cThe contract package will be sent by the seller\u2019s solicitor to your solicitor. It usually includes a draft sale contract, title documents, Energy Performance Certificate (EPC) and replies to Commercial Property Standard Enquiries (CPSEs). CPSEs are general enquiries raised on the purchase of a commercial property.\u201d<\/p>\n\n\n\n
Following this stage, your solicitor will carry out due diligence checks on the property. These will be in line with your requirements, but also with your lender\u2019s. Assuming nothing to break the deal is discovered, the solicitor will then \u201creview the terms of the mortgage and any other security documentation that has been provided by the lender,\u201d according to Commercial Trust. \u201cYour solicitor will also need to respond to any lender\u2019s requirements, if applicable.\u201d<\/p>\n\n\n\n
Finally, the terms of sale and transfer deed need to be negotiated, again involving both sides\u2019 solicitors, and contracts exchanged. \u201cAt completion, your solicitor will receive the funding from your lender,\u201d says Commercial Trust. \u201cIf it is a purchase, they will send the remaining balance to the seller\u2019s solicitor, the transfer deed and mortgage will be completed and the legal title in the property passes on to you.\u201d<\/p>\n\n\n\n
Sources:<\/strong><\/p>\n\n\n\n
Josh Phegan<\/a><\/p>\n\n\n\n
Commercial Trust<\/a><\/p>\n\n\n\n