Buying commercial property in the UK can be a profitable way to invest in property or to benefit from owning your own business premises. Income is typically generated by leasing commercial property out to other businesses and/or through capital gains. If your property is for your own business, owning your premises may be more cost-effective than renting, and it may provide other advantages as well.
Leases for commercial property in the UK tend to be longer than in some other parts of the world, which can lead to a more stable income. Also, recent tax changes to residential property investments have encouraged more investors to turn to commercial property.
Despite these potential benefits, as with any sort of investment, buying commercial property is not risk-free. Doing your research and getting the right advice can go a long way towards assuring a happy and profitable investment. In this guide, we’ll discuss the pros and cons of investing in commercial property, and give you some useful information about commercial property finance.
What is Commercial Property?
Commercial property is defined as any property or land that is used for business purposes. Here are the 5 main categories of commercial property:
- Offices – such as shared office blocks or small single occupancy offices
- Retail – such as shops and shopping centres
- Leisure – such as eating and drinking establishments and sports facilities
- Healthcare – such as hospitals and nursing homes
- Industrial – warehouses and factories
Buying commercial property can be suitable for experienced investors looking to diversify their portfolio, or for less experienced investors looking to take their first steps into property investing. It may also be suitable for business owners who wish to own their premises. Let’s have a look at some of the benefits and drawbacks of buying commercial property in the next sections.
What Are the Benefits of Buying Commercial Property?
Some of the potential benefits of investing in commercial property are:
Capital Growth
Although past performance should never be taken as a guarantee of future results, over the long term, commercial property tends to increase in value. Purchasing and holding a commercial property for some time could produce a profit when you come to sell it.
Rental Income
If you decide to lease out your property (or parts of your property) to other businesses, you’ll benefit from rental income. This can help to cover the costs of purchasing and running the property and may lead to a profit.
Raise Finance
You may be able to use your equity in the property as collateral to raise finance for your business or other investments. Plus, if your property increases in value over time, this can result in more equity and potentially greater borrowing power.
Tax Benefits
Owning commercial property in the UK currently comes with tax benefits that could help to make your investment more profitable. As investing in residential property has recently become less tax efficient, many landlords are turning to commercial property instead.
Please note that we are not tax advisors and we suggest seeking specialist tax advice before investing in commercial property.
More Control
If you ever wanted to change or develop the property, owning it will allow you the freedom to do this. If the property is for your own business premises, owning it may give you more control and stability over the long term.
What Are the Drawbacks of Buying Commercial Property?
Some of the potential drawbacks of investing in commercial property are:
Cost of Purchase
Buying a commercial property will usually require a significant upfront cost. The maximum loan-to-value that lenders offer is considerably lower than with residential property, so you’ll typically need at least a 25-35% deposit.
Cost of Mortgage
Commercial mortgages tend to be on variable rates, meaning they can increase or decrease along with the Bank of England’s base rate. It’s important to consider how you’ll keep up with repayments if rates were to rise or your property was to become vacant.
Cost of Maintenance
If you’re leasing out a commercial property, your tenants will typically be responsible for any non-structural repairs but you may have to cover any structural repairs. If you’re an owner and occupier, you’ll typically have to cover all repairs and maintenance.
Loss of Liquidity
As with most property investments apart from some funds, buying a commercial property may tie up a considerable portion of your cash. Although you may be able to borrow money against your property, it may take a long time to sell the property if you ever needed to.
How to Finance a Commercial Property
If you’re looking to purchase or remortgage a property to be used as your business premises, you’ll need to get an ‘owner-occupier commercial mortgage’. These can also be used if you’re planning to use your property for both commercial and residential purposes.
If you’re planning to purchase or remortgage a property to lease to other businesses, including for mixed-use or semi-commercial purposes, you’ll need to get a ‘commercial investment mortgage’.
No matter what type of commercial property finance you need, the first step is to speak with a specialist. Our expert commercial mortgage brokers will listen to your requirements and find a deal that suits your needs. We can also apply on your behalf to help the process go as smoothly as possible.
Where’s the Best Place to Buy a Commercial Property?
If you’re looking to purchase a business premises for your company, the location may be dictated by the location of your target market. However, if you’re buying a property to lease out to other companies or to act as a head office for your company, you may have more freedom to choose an area with lower prices and greater potential for capital growth and/or yield. London is still a popular location for commercial property, especially for the tech sector, but you may find better value outside of the capital. Get in touch with our property sales team, as they may be able to help you find a good-value commercial property or at least point you in the right direction.
The Bottom Line
If you’re thinking of buying a property for business purposes, this will likely be classed as commercial property. This may include property that you lease out to other businesses, property that you use for your own business, or both. There are advantages and disadvantages to investing in commercial property, as we’ve discussed above, but when done correctly it can be a profitable sector. We recommend speaking with an expert to discuss your project further and to find the right commercial mortgage for your situation.
At Michael Usher Mortgage Services, we’ve been helping our local community for over 30 years! We offer a comprehensive range of products from across the market, including specialist deals that aren’t available directly from lenders. We’ll find a deal that suits your needs, guide you through the process, and liaise with your lender, estate agent and solicitor to ensure your application goes smoothly. We can also help to protect your mortgage with our FREE Insurance Service.
Talk to one of our friendly mortgage advisors for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
Talk to a mortgage advisor for FREE
Your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The precise amount will
depend on your circumstances but will be agreed with you before
proceeding.
