Investing in commercial property can be an attractive alternative to buy-to-let. Invest in the right property in the right location and secure a good tenant and commercial property can be an excellent long term investment producing a higher income that residential lettings.
However, potential commercial property landlords need to be aware of some of the higher risks involved:
1. Our high streets are struggling at this time with many towns suffering with vacant units. This means that not only are rents depressed, units can sometimes be difficult to let.
2. Offices are also suffering with more people able to work at home and remotely. The demand for office space has been considerably reduced since Covid.
3. When commercial units are vacant all the running costs fall on the landlord: full business, insurance, security issues and utility charges.
On the positive side of the equation, when values are depressed opportunities are around, so there’s always the chance of picking up a real bargain.
One of the major advantages of commercial property investment in the UK, says Shawbrook Bank, based on its current research, is that leases are longer than those in the US and EU, and they are longer than leases on UK residential properties.
The average lease length for an office is eight years which means a relatively stable income for an extended period of time. “Recently the property market has started to lean towards commercial property investment as changes in tax laws have negatively impacted residential buy-to-let landlords,” says Shawbrook.
Commercial property refers to all property and land that is used for business activities. Under the Town and Country Planning (Use Classes) Order 1987, UK commercial property is categorised under different classes. These classes include business, drinking establishments, financial and professional services, hotels, leisure, retail, storage and more. Commercial property also includes mixed use properties such as shops with flats above them.
More than a third of landlords recognise potential of commercial property. 33% of landlords plan to invest in small retail units, 29% of landlords are investing in commercial property to support their communities In 2023 one-in-five landlords (19%) are considering diversifying into commercial property, according to recent research from Shawbrook.
In the midst of economic volatility and uncertainty within the property market, landlords are looking for ways to diversify their properties and adapt their strategies in order to future-proof their portfolios. More than a third (37%) of landlords who are planning to invest in commercial property cited diversification as the key reason for doing so.
Those who already own commercial properties are also planning to expand further, Says the Bank, with 35% of landlords with commercial assets stating that they are looking to invest in more in the near future.
Those with larger portfolios are more likely to have already invested in the commercial space, though they are far from the only investors recognising the potential. 36% of all landlords said that they have noticed the increase in demand for commercial property and view it as a good investment opportunity. In addition, a quarter of landlords believe there is currently a lack of good quality properties for businesses, indicating a possible need for development or conversion work.
Many landlords see the opportunity to branch into commercial property as a chance to support their local community (29%), with many planning to invest in small (33%) and large (30%) retail space.
As our high streets change shape with more of a focus on local, independent, and experiential stores, landlords have the opportunity to play a role in the revival of the high street and boost our town centres across the UK. With hybrid working, more workers are outside of cities during the working week, meaning more opportunities for smaller businesses in towns and village centres.
Hybrid working has also prompted a re-evaluation of our office needs, with many businesses looking for spaces that support the new ways of working. Demand for office space has increased according to recent data from Rightmove, and research from IWG found that half of businesses have opened offices and workspaces outside of city centres. This has sparked landlords’ in this type of commercial investment (36%). Other types of investment that landlords are interested in diversifying into include:
• Industrial or manufacturing space – 28%
• Factories or distribution space – 28%
Emma Cox, MD of Real Estate at Shawbrook, says:
“Fluctuating prices and high borrowing costs are hampering confidence in the residential property sector.
“As a result, landlords are looking for other ways to diversify their portfolios and cater for current demand. The increase in workers returning to offices and the evolution of local highstreets are two examples of areas where landlords will be seeking opportunities to invest, and those who already own commercial properties will be looking to add more. Landlords could become the unsung heroes of the high street, with many planning to support their local communities by injecting new life into commercial properties and retail units.
“Commercial property is certainly a good prospect for those who have typically specialised in the residential market and are looking to adapt their strategies now or in the near future.”
About Shawbrook Bank
Shawbrook Bank says it is a new type of specialist financial services company, combining the relentless focus on customer service and innovation you would expect from a fintech with the expertise and certainty of a bank. Shawbrook is driven by a purpose to solve complex problems that unlock opportunity for its rapidly growing customer base of over 450,000 UK consumers and businesses.