UK commercial property prices fell by a staggering 44% in the property crash of 2007-2009. However, a great deal of recovery has been made since then. Commercial property has, once again, become an attractive and lucrative investment option. In fact, investment volumes in UK commercial property are set to exceed £70 billion in 2015.
Compared to residential property, the barriers to entry in commercial property investment are high. As a result of the initial investment costs involved, many would-be investors struggle to raise the capital required to get on the property ladder. However, once an investment has been made – whether through help from a property fund or loan – the yields can be substantial.
The returns from a commercial property are driven by the potential level of rental income and the price (i.e. the capital price) investors are willing to pay for that rental income. So where’s the best place to start if you want to maximise your returns
Do your research
Don’t rush in blind. If you want to reduce the risk of any nasty surprises down the line, take the time necessary to thoroughly research the property before you invest. Here are few areas to consider during the research stage:
Should you buy the property personally or through a company? This is a key consideration as corporate tax rates are much lower than personal tax rates and using a company will be a tax efficient way of paying off the debt.
Maximising your ROI begins with ensuring you seek advice from a professional valuer to accurately assess the property, and make certain that you do not pay more than the fair market value. The importance of a valuation cannot be overstated. Commercial property valuation is often more complicated than residential valuation and takes into account any potential income streams associated with the property.
The level of rental income a property will return is determined by tenant demand and the quality of covenant that each tenant brings to the table (i.e. the certainty that the landlord will continue to receive the income for the duration of the lease). For example, the value of a tenancy held by a blue-chip tenant – such as a government department or utility company – will be superior to a company will less certainty, like a local fashion retailer.
However, the potential to increase the level of rent is also important. Improvements to the property or external changes in the market can affect demand for the property and consequently the rent it can command.
For instance, increasing economic activity could increase property demand in a particular location, which can elevate rental prices. Conversely, the development of newer alternative property nearby can decrease demand.
How to generate more income from your commercial property?
Once you have made the commitment to investment, there are other ways to generate income from the property. Here are just a few:
Selling advertising space is a savvy way of generating additional income. It could be space on the outside of the building for signage, or you could partner with another local business to advertise their products within your apartment block.
Charging for the provision of additional services is something you should consider if you are searching for ways to maximise your ROI. Examples include:
- Working the services of your own company into any letting agreements. For example, maintenance or waste disposal services.
- If leasing office space, retaining control of any parking spaces on the property and charging for them.
So what happens when it’s time to sell?
A lot of people invest in commercial property to generate a capital gain. The gain is taxable, but the level of appreciation will depend on the supply and demand of that type of property, as well as the rental returns and the quality of the tenants.
Looking for help managing your finances?
If you want to maximise the returns on your commercial property, the best place to start is with your numbers. With accurate, up-to-date financial records, it’s easier to plan for the future, automate processes and even collect payments faster.
If you need help managing your finances, Flow’s team of expert cloud accountants can help. As leading cloud accounting specialists with over 60 years’ experience managing small and medium-sized businesses, we provide accounting services for all sectors and specialise in property. For more information, call 0330-123-5577 today or take a look at our commercial property know-how.
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