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Commercial Investments – A Viable And Exciting Alternative To Property?

by Nikki Dale -

  • What commercial investment should you invest into?
  • How many commercial options are not out of bounds for investors?
  • Why residential property investors should have commercial investments in their portfolio
  • What type of people prefer and consider commercial investments?
  • Is there a good time to invest in commercial?

What do you automatically think of when you hear commercial investment? On a traditional platform we think of offices, retail, leisure or industrial.

These are very traditional and would be classed as a direct investment in commercial property – and considered by many investors as expensive, next-level and probably out of reach – but that’s not necessarily the case.  There are many options that come under the commercial investment umbrella.

What Commercial Investment should I invest into?

There are many ways and means to invest in commercial property assets.  We could essentially split them into three primary categories.

Direct Commercial Investment

Direct investment involves purchasing actual bricks and mortar.  This direct approach is often not viable for many individual investors, as the playing field comes with a high entry level.

For an investor to consider this option they must be aware of risk associated, however if you are experienced (or seek the right expert advice) and you are already in the industry you are investing into, direct investment ownership gives you a tangible and flexible asset and control to pivot with any market flows or trends.  The ownership allows for modification, renovation and even a change in planning and re-development.

Specialist “Commercial” property investments?

Hotel-room & Care-home investments are specialist property investments that fall under the commercial property sector. There are nuances between these options and traditional buy to let property because they are not exactly residential, but do appear similar.

Even Purpose-built Student Accommodation (PBSA) is classed as commercial property, even though it functions as residential property.

PBSA has grown exponentially since 2015 and has been such a popular option for investors that are looking for high income from a sustainable and non-volatile market.

These options, particularly PBSA, is ideal for the first-time investor as the entry level can be from around £55,000 and there are no buying-restrictions or purchaser-criteria that needs to be met, such as restricted or sophisticated investor or HNWI.

Indirect Commercial Investment

Commercial property is so broad nowadays and we can track back to a pivotal point to when even more alternative product was included – this was the financial crash of 2008 when lenders pulled the rug from underneath property developers on a global scale.  Between 2008 and 2010/2011 lenders pulled funding and developers lost millions of pounds overnight.   Obviously, developers took initiative and looked for alternatives as they could not rely on working with lenders – and it made them too wary.  They looked at products where their own and investors interests were aligned.

Indirect commercial investments are where you invest alongside the developer, these have existed for many years from coupons, to bonds and loan notes to crowdfunding.

These platforms allow investors to lend directly to borrowers and cut out the middleman.  The capital is pooled and collectively used to buy land, construct property and/or renovate.

The investor in return, receives a fixed return per loan (variable return product options are also available) and the investment is secured against land / property asset(s) by the borrower.

These options are rather exciting, but you need to seek advice and thoroughly do your own due diligence on the company or developer.  All should come with a warning – by directive – that your capital is at risk.

The good news is the risk is short-lived, normally a one-to-three year term and even though the entry level is so small, often starting at £5,000, there is often a buying-restriction, as purchaser-criteria needs to be met, such as self-certifying as a restricted investor, a sophisticated investor or a HNWI.

What type of people invest in commercial property?

As there are many permutations of commercial property.  The term commercial property (commercial investment/commercial real estate) generally refers to buildings or land intended to generate profit, either from rental income, capital gain or both.

We can see from the categories above there is something to suit investors with varying budgets, varying appetite for risk and varying experience levels.

Often sophisticated investors, so someone that has exposure to investments e.g. residential property, will naturally transitions or diversify their portfolio with a commercial investment.

That said there are many first-time investors that come through organically – in the research stage – who are attracted to the variety and various benefits commercial investments offer.

It’s also not just traditional buy to let investors that transition into commercial.  Experience in Stocks and Shares or property funds, can make investors feel at ease as the structure of certain commercial products sit well with them and instantly appeal – complementing some of their more volatile investments.

What are some headline differences between Commercial and Residential?

One distinction that is quite apparent, and something to compare carefully, is commercial is yield driven and indexed income driven, whereas residential property investment is largely based on growth for medium – long-term return on investment.

Some commercial investments look so much like residential property, however they reap the rewards of being classed as commercial.  Example; PBSA has no stamp duty under £150,000 and is eligible for your pension fund, but HMO’s, houses and flats are not.

Another pro in favour of UK commercial property (Direct Investment).  Tenants are typically responsible for building maintenance and repairs.  Especially with a Full Repairing and Insuring lease (FRI lease) in place.  With traditional residential property, the responsibility for building maintenance and repairs falls to the landlord or at least the property management company – which comes out of the gross rental and reduces return.

When is the best time to invest in Commercial property?

Like residential, commercial real estate can have its cycles, ebbs and flows, therefore it’s good to research when is a good time to purchase certain commercial property that meets your own interests.

And that’s the key part of any investment, the decision is largely personal and then it’s a case of seeking expert advice on all the factors and variables.  Paying particular attention to aspects like the state of the economy can affect your purchase price and risk and impact your long-run income and illiquidity.

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