Complete Guide to Property Investment Strategies - Commercial Property

Please note: This is Chapter 5 in the Complete Guide to Property Investment Strategies, focussing on Commercial property investments.

Commercial Property Definition

As you may have guessed, this refers to investing in purely commercial property and letting out to a commercial tenant or business. It covers everything from lock-up shops to warehouses, retail parks and industrial estates. Effectively, it is like a Mixed Use property minus the residential elements!

In this arena, the quality and financial strength of the tenant is everything and largely determines the value. A unit let to a strong blue chip tenant is a solid investment, but they are few and far between and tend to require deep pockets.

Yield: Its the Other Way Around

Unlike with residential property investment strategies, with commercial property you are actually looking to lower the yield. A commercial property is valued on an investment basis. Therefore, a property with a commercial tenant in occupation is worth more than an empty unit. Similarly, a property let to a blue-chip tenant like Boots with a 15 year Fully Repairing and Insuring (FRI) lease is much more valuable than the same property let to Bob’s Pizza on a 3 year FRI lease. This is why property let to the likes of Boots sell for what are relatively low yields.

Property Investing - Full Repairing and Insuring Lease Explained

Valuing Commercial Property

Because of this, the valuation of commercial properties is much harder than for residential properties. It depends on:

  • The strength of the covenant. Essentially, the terms of the lease and the quality of the tenant.
  • The location. A property located in the centre of town with large footfall is generally more valuable than a similar property on the outskirts of town where footfall may be lower.
  • Supply and demand factors. With large retailers struggling with our changing retail habits of shopping online, larger commercial units are becoming less desirable due to the difficulty of finding tenants needing such a big space.

As such, this is at the advanced end of the spectrum for sure and behaves very differently to residential investment opportunities.

Do note, however, that larger chains (along the lines of Domino’s, Costa Coffee etc.) will have published plans online of where they are looking to open new retail outlets and what their requirements are. Find an empty retail unit and let it to one of these chains would prove very lucrative. As you can imagine, this is much easier said than done!

I mention it here for completeness, but it is really a very different beast of which I have no experience. For the small scale investor, I would strongly recommend sticking to residential (single lets or HMO’s) or mixed-use investment opportunities. There is more than enough to consider within that sphere that will meet any investment objectives. In the case of the latter, I believe the residential element helps smooth out the P&L of the property as a whole as residential lets are much more stable with less voids than commercial lets (generally speaking).

In either event, please see the chapter on Mixed Use Property as much of the same will apply to purely commercial property investments.

TKM Triangle: Commercial Property

Commercial property can be a very different beast from its residential cousin:

  • Time. If you get it right, the time involved in managing a commercial let should be less than that required for a Single Let. This is because it will be let on an FRI lease, minimising your management time as a landlord. This alone makes it an attractive proposition.
  • Knowledge. You need to get fully up to speed with the commercial market, valuation principles and be much more commercially aware of the changing retail landscape wherever you invest.
  • Money. Commercial property ranges from £50k+ to several millions. Generally speaking, you will need deeper pockets for a good investment in a strong location that attracts an equally strong tenant. You will also need access to significant reserves, should the unit become vacant as a commercial property will generally take longer to let.

Property Investing - TKM Commercial Property Triangle

On balance, a well-let commercial property is a simple proposition. However, getting that right is the difficult bit! As ever, I would suggest cutting your teeth in the residential investment arena first, if only to generate some excess cash flow to whether a foray into the commercial investment space.

Take me to Chapter 6: Build to Rent >>