What To Look For When Purchasing Commercial Property
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- 29-06-2023
Are you considering what to look for when purchasing commercial property? Kent Property Witness offer investment property valuation for Tonbridge and Kent. This article offers tips for buying commercial property and what class of building you need.
Tips for Buying Commercial Property
The UK's commercial property market continues to attract significant interest from investors across various sectors. In 2018, investment volume reached an impressive £62.1 billion, surpassing the 3-year rolling average. Unlike the abundance of guidance available for buying residential properties, there is a noticeable lack of information when it comes to purchasing commercial properties.
Buyers and sellers in this domain are expected to undertake thorough due diligence, relying on Chartered Surveyors and commercial property solicitors to conduct comprehensive physical and legal analyses of the target buildings. To navigate the commercial property purchase process successfully and avoid potential pitfalls, being well-informed and prepared is crucial.
In this section, we will provide valuable tips and insights to help you make informed decisions when buying commercial property. From understanding market trends to assessing your business needs, we will explore various aspects to consider, ensuring a smoother and more successful commercial property acquisition experience.
Research The Local Commercial Property Market
Thorough research of the local commercial property market is essential when buying commercial property. While insights from real estate brokers, building brokers, and other investors can be valuable, it's crucial to rely on your own understanding of your needs and standards. Researching the local market involves considering key factors.
Start by understanding the prevailing property values in the area to assess market trends and determine if a property is reasonably priced.
Take into account the local tax rates, as they significantly impact overall ownership costs. Evaluate the tax implications to accurately assess the financial feasibility of your investment.
Stay informed about prevailing interest rates, as they affect financing costs. Fluctuations in interest rates can impact affordability and profitability. Explore the availability of commercial mortgages and understand the financing options and requirements. This will help you effectively plan and budget for your purchase.
Analyse rental values of similar properties to estimate potential rental income and assess the financial viability of your investment. Conduct due diligence to identify potential environmental issues that could affect the property's value in the future. Familiarise yourself with the local competition among investors and the availability of skilled building labour.
Understanding the competitive landscape and available resources will help evaluate the growth potential of your investment. By conducting thorough research on the local commercial property market, you'll gain valuable insights for making informed decisions and increasing your chances of a successful investment.
Ask Yourself Why Do You Want to Purchase a Commercial Building?
When considering the purchase of a commercial building, it is crucial to assess its suitability for your business. Several factors should be taken into account when answering the question of why you want to buy a commercial building:
Firstly, consider if the property allows for future expansion and business growth. Flexibility in terms of available space and the ability to modify the premises is vital for accommodating evolving needs. Evaluate whether the building provides the necessary flexibility to adapt to your business requirements. The layout and configuration should be conducive to customisation and efficient operations.
Additionally, assess the availability of transportation links to ensure convenient access for customers and employees. Consider if the space allowances within the building align with your business activities, providing adequate room for operations, storage, and equipment. Evaluate parking options and the potential for sub-letting unused space to maximise utility and generate additional income.
Finally, contemplate whether the building's location, appearance, and overall impression positively impact your customers, contributing to their satisfaction and loyalty. By thoroughly assessing these factors, you can make an informed decision when purchasing a commercial building that meets your business needs and sets the stage for future success.
What Class of Building You Need
Determining the right class of building is essential when purchasing commercial property in the UK. The Use Class Order sets out distinct use classes, each with its own regulations. Understanding these classes and their restrictions is crucial.
The main commercial building types include offices, retail spaces, industrial premises, leisure facilities, and alternative commercial properties. Offices and retail spaces typically fall under Class E, while industrial buildings are classified as B2, B8, or Class E.
Leisure facilities like restaurants, pubs, gyms, and hotels may have different classifications, often falling under Class E or Sui Generis. Alternative commercial properties, such as petrol stations or schools, have specific use classes like D1 and Sui Generis.
Consider any additional services needed, as some may only be available to leaseholders. For established businesses like restaurants or gyms, short-term leasehold opportunities are often available.
Also, evaluate the location's suitability for your intended use, its impact on property value, leasing prospects, and planning permission for alterations or extensions. By understanding the appropriate building class, considering additional services, and assessing the location, you can make informed decisions when purchasing commercial property that meets your business requirements.
Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax (SDLT) is a vital consideration when buying commercial property in the UK. Commercial properties generally attract lower SDLT rates compared to residential properties.
The current SDLT rates for commercial properties are 0% for the first £150,000 of the property's value, 2% for the portion between £150,001 and £250,000, and 5% for the portion exceeding £250,000. In April 2016, changes to tax relief laws for residential buy-to-let landlords prompted a shift in investment trends, leading investors to explore alternative options.
Converting semi-commercial properties has become popular among investors seeking greater annual yields. One strategy involves letting flat above commercial premises, creating dual income streams and potential tax relief benefits.
By considering commercial properties and the associated SDLT rates, investors can enhance their returns while navigating changing tax regulations. Seek professional advice and carefully assess the tax implications and potential benefits before purchasing a commercial property.
How Flexible Is The Property
Flexibility is a key consideration when purchasing commercial property. It is important to assess the property's ability to adapt to changing market trends and meet the evolving needs of your business.
One prevailing trend in the market is the concept of property "re-purposing." This approach revitalises investment potential and helps sustain ongoing costs.
For instance, the rise of home-based workers has led to an increased demand for co-working spaces, offering a new opportunity for office spaces.
Additionally, traditional high-street establishments are being transformed into retail warehouses to cater to the growing preference for online shopping.
Furthermore, the depreciation of the pound in 2016 has generated a higher demand for industrial spaces, particularly among export-oriented businesses. Consider other factors such as parking availability and space allowances for future expansion. Sufficient parking facilities and room for growth ensure flexibility in accommodating your business's changing requirements.
Budgeting and Property Calculations
Budgeting and conducting comprehensive property calculations are vital stages in commercial property investment. These processes are crucial for assessing profitability and determining the feasibility of a potential investment. To analyse and evaluate commercial properties, several key metrics can be utilised:
- Net Operating Income (NOI): Calculates the net income after deducting operating costs.
- Debt Yield Ratio: Assesses risk by dividing the loan amount by NOI.
- Cash-on-Cash Return: Measures the net cash flows generated by the property relative to the initial investment.
- Net Present Value: Evaluates cash flows and profits over time, considering inflation and the time value of money.
- Cap Rate and Net Yield: Determines the rental income's ratio to net operating costs, with or without mortgage payments factored in.
- Return on Investment (ROI): Calculates the overall return on investment.
When budgeting for commercial property, it is essential to consider various costs, including the initial investment, surveyor and legal fees, Stamp Duty Land Tax (SDLT), repair and upgrade expenses, ongoing operational and maintenance costs, environmental compliance costs, waste management, and mortgage payments.
By conducting thorough property calculations and accounting for all relevant costs, investors can make informed decisions and accurately assess the profitability and viability of their commercial property investment.
Should I Buy a Commercial Property?
The decision to purchase a commercial property typically stems from two main reasons: for business purposes or as an investment for resale or leasing.
In recent years, there has been a growing market for buy-to-let commercial property investments and the practice of flipping commercial properties, similar to residential properties.
Short-term investment tactics in commercial property can yield higher returns, but they also come with increased risk, emphasising the need for thorough due diligence.
Whether buying a commercial property for business use or investment, certain considerations apply. It is essential to approach commercial property investment with careful research and not make impulsive decisions. Engaging experts such as Chartered Surveyors, independent financial advisors, and specialist commercial property solicitors are vital for guidance and support.
By conducting thorough market research, understanding your business needs or investment goals, and seeking professional expertise, you can make informed decisions regarding the purchase of a commercial property. This approach helps mitigate risks and aligns your choices with long-term objectives.
Take Advantage of Professional Knowledge
Seeking guidance from an independent financial advisor is wise when evaluating financing options. This is particularly important when considering financing options like bridging loans, which involve additional risks and choices to consider. A thorough economic analysis of the target asset is essential to assess investment risk comprehensively.
Enlisting the services of an RICS Chartered Surveyor is crucial for conducting due diligence. Their expertise and meticulous surveys can uncover major structural flaws or issues that may have a significant impact on the property. Identifying such concerns can potentially save you substantial amounts of money and prevent future catastrophic problems.
By harnessing professional knowledge, you can approach commercial real estate with confidence. Solicitors, surveyors, and independent financial advisors bring invaluable insights to the table, empowering you to make well-informed decisions and mitigate potential risks.
Remember, each commercial property investment is unique, and seeking professional advice tailored to your specific circumstances is essential. Professionals can provide invaluable support in navigating legal, financial, and structural considerations, ensuring a smoother and more successful commercial property venture.
Are you looking for investment property valuation advice in Tonbridge and Kent?
Contact our expert witness surveyor to discuss your requirements.