Top Tips For Purchasing A Commercial Property In The UK
Commercial property is an attractive choice for investors because ‘bricks and mortar’ potentially offers healthy capital growth, a regular monthly income, and greater security than investing in stocks and shares.
Commercial property comprises a diverse range of property types including office space and retail establishments. It also refers to factories, industrial units, warehouses, and car parking facilities, as well as leisure establishments, such as restaurants, pubs, hotels and gyms.
According to the British Property Federation, the commercial property sector contributes over £100bn to the UK’s economy each year (about 7% of the total).
Advantages of owning a commercial property in the UK:
· One of the major advantages of commercial property investment in the UK is that leases are longer than those in the US and EU, and they are longer than leases on UK residential properties. The average lease length for an office is eight years.
· Your property is likely to increase in value over time.
· You can draw upon the equity as collateral if you need finance for your business.
· You can rent the property out to tenants.
· There are tax benefits to owning commercial property.
· If you want to change the space, you have more control to do so than if you were renting.
Drawbacks of owning a commercial property:
· You will have to make a considerable down-payment at the beginning.
· You are responsible for making repayments if the property becomes vacant.
· Your cash will be tied up in property.
· Whilst tenants are likely to be responsible for non-structural repairs (this would be set out in the lease), you will be responsible for any structural repairs needed.
VKB Building Consultancy has 15+ years’ experience advising clients about commercial property purchase. Here are some of our top tips…
Consider why you want to purchase a commercial building?
You should first question what sort of building you want and why. Will you be using it for business purposes or is it an investment? Consider the location, the local and national economy and the lending market.
Your buying motive will help narrow your search and provide a starting point for what to look for. If you’re looking to buy a commercial building for use, then it’s worth considering whether or not you’d be better off on a short-term rent or lease.
Have a good understanding of the planning issues.
Consider what class of building you need
The Use Class Order sets out the use classes of buildings in the UK. Each Use Class comes with its own unique set of rules and regulations that forbid uses outside the scope of the class. It is sometimes possible to change the Use Class of a building using Permitted Development Rights.
You should also consider the location of the property. This is crucial if you’re hoping for the building to appreciate in value so you can lease it or sell it later; however it is also important if you need to take out Planning Permission on the property for use changes, renovations or extensions.
Chartered Surveyors can advise you on the location of the building and property checks will reveal any restrictive covenants, Article 4 planning restrictions or other issues that could affect your redevelopment plans.
Consider the energy rating
When looking for a new property to purchase, you should look for a commercial building with at least an EPC rating of E or above.
MEES, or Minimum Energy Efficiency Standards, are minimum requirements for EPC ratings enforced by the government. From April 2023, an extension of the MEES regulation will prohibit landlords from leasing out commercial buildings with an EPC rating of F or lower.
Purchasing a property with a lower EPC rating than E, could lead to difficulties when the new UK law is enforced.
Research the Market
Once you have defined the type of property you are looking for, researching the market can help bolster your position.
Examine trends in the local and national commercial property market, considering factors such as current values, supply, availability of commercial mortgages and – if you plan to let the property – tenant demand and rental values.
Seeking advice from a specialist commercial property adviser is recommended. Not only will they possess in-depth local market knowledge, but they will also have intel regarding which properties are due to come on the market, plus any off-market opportunities.
Make sure the property is financially viable
Calculating realistic budgets and making profitability/viability checks is one of the most important stages of commercial property investment. Ongoing costs vary between buildings, but it’s crucial to not underestimate the role they play in your budgeting.
Here are some metrics that you should be aware of when analysing and assessing the viability of purchasing a commercial property:
· Net Operating Income: Calculates the net operating income of a building after operating costs.
· Debt Yield Ratio: Calculates loan divided by NOI to provide a risk indicator.
· Cash-on-Cash Return: Calculates net cash flows divided by the initial investment.
· Net Present Value: Calculates inflation-adjusted cash flows and profits throughout time.
· Cap Rate and Net Yield: Calculates rental income divided by net operating costs without mortgage payments factored in. Net yield does factor mortgage payments in.
· ROI: Calculates the overall return on investment.
You’ll also need to provide for:
· The initial investment.
· Surveyor and legal fees.
· SDLT (Stamp Land Duty Tax).
· Any repair costs and upgrades.
· Operational and maintenance cost, either annual or monthly.
· Environmental compliance costs.
· Waste management.
· Mortgage payments.
· VAT.
And the bills don’t end there. You should consider the ongoing costs of maintaining commercial property too. If you plan to let out the commercial property, you will likely want to share some of these bills with your tenant.
The costs of owning a commercial property might include:
· Insurance
· Repairs and maintenance
· Services, including security and cleaning
· Local authority charges, including waste collection
· Retaining a commercial property estate agent to manage the building
· Commercial mortgage repayments, if applicable
Exercise Due Diligence
Once you’re confident that the building fits your expectations/requirements and are happy with financing options, it’s time to make an offer.
Heads of Terms will be drafted by each party’s legal advisors. This will set out a timeline for conveyancing, carrying out checks, searches and surveys on the property and eventually, completion.
At this stage, both parties will embark on the process of due diligence, which will first involve the following searches:
· Local Authority Search
· Drainage and Water Search
· Environmental & Flood Risk Search
· Highways Search
· Chancel Search
After that, it’s essential to carry out a building survey with the assistance of a Chartered Surveyor. It’s normally advised that a full Building Survey is carried out on commercial properties.
If you’re hoping to extend or redevelop the property, then you’ll also need a planner to work with the surveyor. VKB Building can recommend a good planning company and are always happy to make introductions, or manage the process if you prefer.
Never rush the process of due diligence – the onus is on the buyer to uncover all necessary and relevant details of the property prior to completion.
Take Advantage of Professional Knowledge
Commercial real estate is a complex legal domain. Professional insight is an absolute must, there is simply no way that you can take on a commercial investment project without the assistance of solicitors and surveyors.
Enlisting a RICS Chartered Surveyor is crucial for the due diligence process. Your survey may alter the perception of the building, especially if major structural flaws are discovered. This could enable you to save vast quantities of money, or even save your property from catastrophic issues down the line.
We would also recommend you with an independent financial advisor when it comes to comparing financing options. When you delve into financing like bridging loans then there’ll be more options and risks to weigh up. It’s hard to account for investment risk without performing a rigorous economic analysis of the target asset.
Consider Tax Incentives
There are several tax incentives and schemes that provide relief for some commercial property investments. These do vary throughout time, and it’s also possible to find localised schemes to incentivise businesses to clean up and redevelop commercial property and land to strengthen the local economy, etc. Contact your local Planning Authority and discuss your plans.
Here are some current nationwide tax relief and incentive schemes:
· Capital Allowance allows UK businesses to claim against their taxable profit under the Capital Allowances Act.
· Business Premises Renovation Allowance (BPRA) is a tax incentive for converting or renovating unused qualifying business premises in a disadvantaged area.
· Land Remediation Relief is a corporation tax relief. It provides incentives for qualifying expenditure incurred from cleaning up contaminated land.
· R&D Tax Credits may also apply to your business if you wish to carry research and development work on the commercial premises.
Note that these forms of tax relief will apply in certain circumstances. HMRC or your local council or Planning Authority should assist you if they feel that you can claim.
Don’t Rush the Process
The Heads of Terms will help guide how long you have to complete due diligence checks before completion. However, it’s important to bear and mind that this isn’t usually contractually binding, so you are not obliged to finish everything within the timeframe.
If any problems arise or are highlighted, take your time to sort them out before exchanging contracts. It’s exceptionally difficult to take a step back after completion, so ensure that every base is covered, and no stone is left unturned before taking the final step.
If you are considering purchasing a commercial property, VKB Building Consultancy can help guide you from the outset. Don’t hesitate to get in touch!