Building a commercial property portfolio

Getting started

With the property market widely considered to be one of the safest long-term investments and with returns looking attractive in the current low-interest rate environment, building a property portfolio is a commonly held ambition amongst private investors.  Appropriate research, a common-sense approach and investing in locations and properties with long-term appeal and good market demand can lead to significant profits.

Residential is a market everyone understands… but with more onerous tax legislation now eroding returns, those looking to make regular income from property are increasingly seeing the advantages of commercial

Why commercial?

Residential buy-to-let investment has become commonplace across the UK and it is not hard to understand why: residential is a market everyone understands and the housing crisis means homes are rarely vacant for any significant period. But, with more onerous tax legislation now eroding returns, those looking to make regular income from property are increasingly seeing the advantages of commercial.

Important considerations 

Despite a more favourable tax regime, commercial property comes with its own unique set of potential pitfalls. Significant consideration needs to be paid to location and lettability as there are generally more buildings chasing fewer potential tenants.

Obsolescence is also a much more common issue: EPCs need close scrutiny, as if a building fails to meet a certain standard you may not be legally allowed to let it out or sell it, and works to bring it up to scratch could be expensive. You should also think carefully about the wider economy and which sectors – office, retail, industrial
or alternatives – are attractive in your chosen market.

Offices

Before investing in offices, it is important to think about occupier demand. Anywhere with availability below 3% means the prospect for future rental growth is good. On this basis, Central London, Oxford, Cambridge, Bath, Manchester, and potentially Birmingham at grade A level, all look like strong office investment locations.  Think carefully about macro trends and how those might impact your choice of micro location: with many companies encouraging hot-desking and working from home, overall demand for space could decrease. In this context, more attractive locations, such as town and city centres where there are strong amenities close by, are likely to be less risky than business parks.

Retail

In a sector suffering from the rise of internet shopping and riddled with high-profile administrations and store closures, consideration of tenant demand is vital, as good value when you buy an asset could be offset by vacancy further down the line. Think about who the tenant might be: town centres are becoming more focused on leisure and experiences, with cafés, bars, and restaurant concepts proving more popular than traditional retail. Units with ancillary space above that can be converted to residential may also offer opportunities, as might buying two small units next door to one another that could be knocked together to provide a floorplan that might appeal to a supermarket convenience store format.

Industrial

Rents have tended to be low compared to other uses, but this sector, which has already benefited from the growth of online retail leading to higher demand for logistic warehouses, could be set to benefit further from the weak pound and Brexit meaning a return to manufacturing in the UK. A substantial amount of industrial land has also been converted to residential (for example London’s Docklands), which has taken some of the supply out of the market. Leases tend to be shorter though, so more asset management might be required than owning a shop or office.

Alternatives

Alternatives include assets such as hotels, gyms, nurseries and funeral parlours. These tend to be destinations in their own right, meaning micro location and footfall may be less important. These assets could often also conceivably be converted for alternative uses such as residential, providing short-term income and a long-term opportunity.

Jeremy’s top five investment tips

1. Invest in what you know.  

If you live in Macclesfield, the chances are you will have a good knowledge of the local market, and its good, bad and up-and-coming areas.

2. Consider the macro and the micro.  

Think about whether the economy is improving generally, the effects of political events such as Brexit, and whether wider market forces could affect local tenant demand for your property. Interest rates and inflation could also impact your finances and investment decisions, as well as those of your potential tenants.

3. Put yourself in your customer’s shoes.

If you are developing an office building, think about whether you would want to base a business there. If not, why not and what could you do to make your building more appealing?

4. Think long term.

If the market changes, do you have a plan B? If your tenant moves out, would it be easy to find another occupier? If not, is it likely you could secure planning to change the building’s use to something more viable? When do you plan to sell and who might the potential purchaser be?

5. Do your homework. 

Thoroughly research the market, talk to local agents, look at stats, recent deals and rents for equivalent properties, find out about local developments and how they might affect your asset, and carefully calculate costs and expected returns to make sure the sums add up before you purchase.