Commercial property has always had something of a Cinderella image when it comes to property investment. However, with it becoming trickier to make the numbers add up in residential buy to let the commercial market has come more into focus of late. Recent moves in values in the market have made it even more interesting. So we will take a look at the commercial property investment market here.
Firstly there are, of course, some downsides to investing in commercial property. In recent decades commercial values have been high. High entry prices have meant that commercial property has mainly been an institutional-grade investment with limited opportunities for smaller property investors.
Also, the letting potential of commercial property depends on demand from tenants. Sectors like retail have been hard hit by the decline of high street retail and Covid, making prospects more uncertain for investors. Rising interest rates have also provided another challenge to this market.
It can also be more difficult to raise finance for a commercial property investment.
Tighter Minimum Energy Efficiency Standards (MEES) are also presenting challenges in the commercial property sector.
What are the attractions of commercial property?
Despite the drawbacks there are a few things that can make commercial property attractive, however.
Commercial properties are usually let on longer leases. Tenants are responsible for maintenance and repairs in many cases. So it is more of a ‘hands off’ property investment than residential property. Commercial property is not being impacted by increasingly more onerous rules and regulations which are affecting the residential sector.
Investing in commercial property can offer tax advantages too.
For example, unlike residential property (when owned by a private individual) it is possible to claim mortgage interest as an allowance against tax when purchasing commercial property.
Pension rules do not allow those with a SIPP or SSAS pension to invest in residential property. But they do permit an investment in commercial property. This can be of use to company directors in particular who may want to invest some of their own pension pot into commercial property.
Professional financial advice should always be sought on the possible tax advantages (or disadvantages) of investing in commercial property.
Stamp Duty is lower for commercial property, and there is no ‘additional property’ surcharge as with residential.
Commercial property also offers a range of different opportunities. It divides into sub-sectors which are extremely diverse such as retail, offices and warehousing – and unique sectors such as pubs, hotels or care homes. It also offers development potential, such as commercial to residential development where redundant, relatively low value commercial property may be converted to in-demand, higher value residential property.
Could commercial prices have reached the bottom?
The main reason for considering the investment prospects of commercial property at the moment is that values have fallen sharply of late. Many experts believe there is value to be had in the commercial property market.
According to a report on January’s CBRE Monthly Index UK commercial property capital values decreased by 13.3% as a whole in 2022, and annual total returns were down 9.1%. This completely wiped out the gains made in 2021. The report adds that the industrial sector was particularly hard hit with capital values down 21% in 2022. Office property fell by 12.1% while retail property capital values fell by 8.1% over the year.
Could a recovery be around the corner?
More interestingly perhaps, some experts believe that commercial values could be nearing the bottom, and that prices could start to recover soon.
A recent report from Schroders agrees that commercial property values have declined sharply of late. But it also suggests that commercial property values could ‘find a floor’ over this summer and this could be around 25-30% below their summer 2022 peak. They believe this could cause investors to start buying commercial property again, which could lead to prices rising. The report summarises: ‘UK real estate has endured a tough nine months, but we think the makings of a recovery are starting to fall into place.’
Property markets have proven themselves cyclical over the years of course, with rises tending to be followed by falls and then a further rise in value. So it is interesting to contrast the commercial market with the residential property market. Many experts are predicting residential values will fall this year, but values haven’t really started falling as yet. And no one is all that willing to forecast when the bottom of the residential market might be.
So in summary while commercial property has never been considered such an attractive opportunity to many, particularly smaller property investors things could be about to change this year. There could be value to be had to investors who are willing to consider this market.