How To Invest in Commercial Property in The UK?

commercial property investment guide by pluxa property

Over 1 million U.K. residents enjoy working in the commercial property sector. 

In 2022, the commercial property industry paid more than £18 billion in taxes. Another £26 billion was paid out in business rates. 

In total, this added to around £74 billion to the economy. 

For investors, commercial property investment is an attractive choice, as you may observe in the above. It indicates a higher profitable opportunity and capital growth when compared to investing in stocks and shares. 

Now, let’s understand how you can kick off your first investment in commercial property!

What is commercial property investment?

A commercial property investment is the purchase or lease of real estate or a business to generate profit. These properties are used for business or non-residential purposes. There are several ways you can invest in a commercial property, such as through:

  • Office buildings 
  • Hotels 
  • Retail stores 
  • Warehouses/industrial settings
  • Medical centres 
  • Multifamily buildings 

You can earn income by either renting to a tenant or from an increase in the property’s value. This value is independent, meaning it is seldom affected by what’s happening in the stock markets. 

If you’re considering investing in this profitable asset, there are some key considerations you need to make first.

👉 Learn whether commercial property is still a good investment opportunity or not.

What are the key factors to consider before investing in commercial properties?

Before investing in commercial properties, it’s important to understand the challenges alongside opportunities of this asset class. Here are 5 major key factors to consider:

1. Duration of the investment 

    The duration of investment will depend on your financial goals. Are you looking for steady growth or short-term gains? Having a clear answer to this question will impact your investment strategy. 

    2. Type of commercial property 

      There are various types of commercial properties, such as retail, office, and industrial. In 2023, offices and industrial real estate were the most popular commercial property, making about 27% and 20% of investment value.

      However, you can choose one as on your personal experience and knowledge. Look for opportunities in new areas and pay attention to regeneration projects attracting businesses.

      3. Leasing vs. purchasing a commercial property 

        Leasing vs. purchasing a commercial property 

        Purchasing, or owning a commercial property offers benefits like value appreciation, rental income, and greater control over any changes. However, it may require a huge down payment, repayments, and maintenance costs. 

        On the other hand, leasing provides lower costs with better cash flow, flexibility for relocation, and higher total payments. The downside is there can be a lack of capital growth. 

        4. Location of the property 

          Location is most important when investing in commercial properties. Consider factors like proximity to transport, economic growth, and demographic trends. For instance, cities like Manchester, Liverpool, Bristol, and Dundee are strong markets with high development. London is still competitive but is pricier for bigger properties. 

          5. Funding of the investment 

            Some options available are:

            • Direct investment: Purchasing an entire property or a share
            • Bricks-and-mortar funds: Collective investment schemes
            • Indirect property funds: Purchasing shares in companies with REITs or publicly traded homebuilders

            How to start investing in a commercial property?

            The above factors will define your investment goals. This will then help you begin your investment and shape your investment strategy. 

            These are the following steps to start investing in a commercial property:

            Step 1. Research the market 

            You can research the U.K. commercial property market by reviewing reports from Property Week, Estates Gazette, and ONS. Consider these factors:

            • Rental yields and infrastructure projects 
            • Economic indicators, such as interest rates, GDP, and consumer spending
            • Tax implications of owning commercial property, including CGT, stamp duty, and business rates

            Step 2. Assess your finances 

            In this step, determine your investment capacity by accounting for taxes, maintenance, and vacancies. Then, create a detailed budget that includes costs like purchase, legal fees, and property management. This ensures you have a realistic financial plan.

            Here is a possible finance cost items to consider:

            Cost CategorySubcategorySpecific CostsTypical Range/Notes
            One-Time Purchase CostsProperty AcquisitionPurchase priceMarket dependent
            Down payment20-25% of purchase price
            Closing CostsTitle insurance4-6% of purchase price total
            Property inspection$300-500
            Appraisal fees$300-600
            Loan origination fees0.5-1% of loan
            Recording fees$100-200
            Attorney fees$500-1,500
            Setup CostsInitial renovation/repairsVaries by property
            Furniture/appliancesIf furnishing unit
            Regular Operating ExpensesMonthly Fixed CostsMortgage paymentPrincipal + Interest
            Property insurance$800-1,200 annually
            Property taxesLocation dependent
            HOA feesIf applicable
            UtilitiesWaterIf owner-paid
            ElectricityIf owner-paid
            GasIf owner-paid
            Internet/CableIf owner-paid
            Professional ServicesProperty management8-12% of monthly rent
            Marketing/Advertising$100-300 per listing
            MaintenanceRoutineHVAC servicing1-2% of property value annually
            Pest control$30-50 monthly
            Lawn care/snow removal$100-200 monthly
            General repairsAs needed
            EmergencyUnexpected repairsVariable
            Property upgradesAs needed
            TurnoverCleaning between tenants$200-400 per turn
            Financial ReservesVacancyVacancy fund8-10% of rental income
            Emergency fund3-6 months of expenses
            Capital expenditure fundVariable
            Tax RelatedAnnual TaxesProperty taxesLocation dependent
            Income tax on rental incomeBased on tax bracket
            DeductionsMortgage interestTax deductible
            Property depreciationTax deductible
            Operating expensesTax deductible
            Travel expensesIf property-related
            Professional ServicesReal EstateAgent fees5-6% of sale price
            Property management8-12% of rent
            FinancialAccounting services$200-400 annually
            Legal services$150-400 per hour
            Tax preparation$250-500 annually
            Insurance brokerUsually commission-based

            Step 3. Explore financing options 

            The next step is to get your funds to cover the property purchase. Compare commercial mortgage options and speak with banks or brokers to determine the best financing option. In this process, understand the interest rates, loan-to-value ratios, and repayment terms.

            Step 4. Engage professionals 

            Commercial property transactions can be complicated. Hence, consider working with experts to ensure the entire process follows legal terms with efficiency. 

            For this, you can hire a commercial property agent, like Pluxa Property, to help you find suitable properties and handle everything for you. 

            Contact our experts and learn how our property investors can help you invest in commercial properties.

            Step 5. Identify the right property

            This step is important as the location and type of property will impact your ROI. Look for properties that match your budget and market research. Make sure that the property aligns well with your long-term or short-term goals. Evaluate things like tenant stability, lease agreements, and the physical condition of the property.

            Step 6. Conduct due diligence 

            Before making the final purchase, you must ensure the property is free of legal, financial, and other issues that can hurt your investment. 

            A thorough due diligence reduces this risk. This is the process where the property is inspected from a legal point of view. 

            After completing the due diligence, you’ll be confident the property is a solid investment and free from hidden issues. 

            If you want to partner with a property investment company in the UK that will handle all of the steps and other investment-related tasks, contact our team at Pluxa Property.

            Step 7. Make your investment 

            With all the research, finances, and due diligence in place, you’re ready to make the purchase. You will receive the ownership or leasing of the property, starting your investment journey. If you’re purchasing, make sure you have a management plan for self-management or through a property manager. 

            Investment strategies for commercial properties

            If you’re new to commercial property, knowing the right investment strategy can be confusing. Below are the top three investment strategies, categorised to fit different needs and market conditions.

            1. Houses in multiple occupation (HMOs)

            HMO investment is a high-yield strategy which involves renting out individual rooms to multiple tenants within a property. It is conducted in areas with high demand, such as student towns or big cities. 

            Ensure the property meets local HMO licensing laws and local council regulations. Also, avoid investing in areas with oversupply of HMOs.

            2. Commercial-to-residential conversions 

            This is a strategy where underused commercial buildings are converted into residential units. You capitalise on increasing demands for housing by leveraging new, relaxed planning laws. To begin, you can target empty or unused properties in prime locations. Take advantage of local planning regulations for easier conversions. Then, renovate the property to sell or rent.

            3. Flipping for first-time buyers 

            This is a much shorter-term gains strategy. Property flipping involves buying a run-down property, renovating it, and selling it quickly for a profit. Focus on properties that will appeal to first-time buyers. This allows you to tap into markets that often prefer ready-to-move-in homes.

            • Target properties in need of renovation, those under £300,000
            • Market the property to first-time buyers
            • Avoid long renovation projects

            What are the Legal considerations for commercial property investment?

            When investing in a commercial property in the U.K., you must be aware of important legal considerations. 

            1. Leasing agreements 

            Leasing agreements determine the relationship between landlords and tenants. It outlines terms like rent, duration, and responsibilities. A well-drafted lease gives clarity and protects each party’s interests. This clarity will ensure cash flow and property value. 

            The Landlord and Tenant Act 1954 outlines the obligations and rights within commercial leases. It protects both landlords and tenants from malpractices.

            2. Financial and tax implications 

            There are some tax obligations linked to commercial property investments, such as Stamp Duty Land Tax (SDLT) and VAT. SDLT applies when buying property and VAT may apply if the property is registered for VAT or meets Transfer of a Going Concern criteria. 

            It’s important to accurately calculate SDLT and VAT to avoid unexpected legal costs. If not, it can significantly impact your ROI.

            3. Planning and building regulations

            There will be some local planning laws and building regulations that you must comply with. Planning permission might be required for any changes or specific uses of the property.

            The Town and Country Planning Act 1990 oversees planning permissions and the Building Act 1984 puts forward compliance requirements for building safety and standards. Adhering to these regulations will help you avoid costly legal issues in the future.  

            4. Landlord and tenant rights and responsibilities 

            Once the investment is completed, landlords and tenants have specific rights and responsibilities under the lease agreement. For instance, landlords have the duty to ensure the building’s safety and maintain common areas, while the tenants must pay rent and maintain the interior.

            A major law you should be aware of is the Landlord and Tenant Act 1985 which provides guidelines on repair obligations. The Housing Act 1988 also covers rental agreements and tenant protections.

            5. Health and safety obligations 

            Compliance to health and safety regulations protects your investment’s value by reducing risk of injuries and legal liabilities. These safety regulations also include fire safety laws, maintaining safe exits, and general building safety. 

            For workplace safety standards, you can take a look at the Health and Safety Act 1974 or the Regulatory Reform (Fire Safety) Order for commercial properties.

            Why choose commercial property over residential for investment return?

            If you’re looking for a higher rental income along with opportunities for additional income, then commercial property is a better option. The U.K. commercial estate is projected to see an annual total return of 7.5% between 2024 and 2028. 

            When compared to residential units, commercial properties have longer lease durations, guaranteeing you more reliable cash flows and income streams. Additionally, maintenance expenses fall upon tenants as per FRI leases. 

            Hence, commercial property investment is ideal for investors who want a stable income stream with passive management and low expenses.

            How much deposit do you need for a commercial property in the UK?

            Since most U.K. lenders offer commercial mortgages to owner-occupied properties with a maximum loan-to-value of 80%, you need a deposit of at least 20-30%. 

            However, depending on the commercial property you’re acquiring, you’ll need to pay up to 40% of purchase price. There are some factors that affect this rate, such as your credit score, business income, property’s type, and loan-to-value ratio.

            How Pluxa Property Can Help You Succeed in Commercial Property Investment in the UK

            Investing in commercial property in the U.K. is highly profitable, but the process can be complicated and also be filled with legal challenges. Pluxa Property provides the expertise you need to handle these challenges and facilitates a better investment experience. 

            You will be working with our commercial property agents to make informed decisions, reduce risks, and increase your ROI. Pluxa Property gives you expert guidance on leasing agreements while informing you of tax and financial implications in the U.K.

            We commit ourselves to understand your goals to personalise our services and meet your needs! Pluxa Property can be the ideal partner by your side, regardless of whether you’re new or an experienced investor in the market.

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