Is commercial really worth it

[hech123]

I am trying to understand commercial property but am really really struggling and it really does look like a load of garbage to me, am I wrong?? Is there actually any money in it?

To me it looks like the pension funds have completely ruined it to a point where the yields are so small it is actually not worth doing it.

I can get average yields on residential of 18% and can let them no bother at all, sometimes have tenants lining up. I look at commercial and see very small yields, properties that are worthless when empty, very hard to secure tenants. Am I missing something or has the boat really sailed on commercial property? Will it ever come back?

I have a few shops but I only really bought them for the residential units they came with, would love to hear anyone thoughts who deals in commercial as I would love to get into this market but am really strugglin to find a reason to.

[rentreviewspecialist]

In principle, the attraction of commercial property (shops are my speciality) is the combination of capital and rental growth. Unlike residential where the value of the building is rarely more than its value with vacant possession, a commercial property can fetch a higher price let than when empty.

For example, in 2011,CBRE valued a portfolio of shop properties at £54m, on a vacant possession basis. However, the directors of Sports Direct considered that if the properties were occupied and leased on 10 to 15 year leases they would be worth £75m to £85m.

Where many investors go wrong is in forgetting that the value of the property can differ from the investment value. Instead of buying the property value, they pay the investment value which can mean that any scope for capital gain would be based on that starting price. Another reason many investors go wrong is in forgetting that commercial property is a depreciating asset so needs at least enough rental and capital growth to counter-act the depreciation. For example, if the property is let for say 20 years to a Bank and the investment price paid equates to say 6% then, all other factors remaining constant, for that 6% to at least stay the same the lease would have to have however long a term remaining the investment market would want when it comes to sell. When the term is shorter, for example 5 years, whether the investment value would be the same as when 20 years remained would depend on prospects for reletting at at least the same rent and to the same calibre of tenant. In the prevailing climate, when banks are mostly taking 10 years with a break clause at the 5th, an investment bought on 20 years originally would likely drop in value.

One reason residential lettings are in strong demand is akin to the commercial property market's yield compression during the boom years, where prices jumped because interest rates fell. In other words, the demand is being artificially inflated. Demand for residential lettings is to an extent fuelled by mortgage lending criteria. Relax that criteria and make it easier for people to buy than rent and rents are likely to fall.

With commercial property, most if not all of the management hassle can be put on the tenant. Unlike residential where there is a hefty landlord non-recoverable responsibility which is reflected in the higher yield to compensate.

Generally, with commercial property, the higher the yield the riskier the investment and the greater the likelihood of tenant default and/or long period of void. Low yields are generally considered to be low risk all round.

[hech123]

Hi Rentreview, thanks for the answer. I understand all of this but it still seems a crazy investment for me. I understand that these huge companies let these properties and then suddenly a £1million building is worth £2million because of the lease but how secure are these leases? I look at Woolworths, JJB Sports, Kodak, Comet and many many more.

Looking at this I myslef put little value on alot of these leases, certainly not enough to take a 6% yield on a building that would be very hard to let. Obviously there are some clients that will not go bust but even banks currently are still facing many financial crisis's. Is it just a difficult market best stayed away from?

I would really like to get involved and have been in a small way but it does seem to be a difficult market.