Income or Capital? What do you want from your commercial property investment?
Generating returns from commercial investment takes ingenuity, boldness and foresight and most investors will be looking for either income or capital gains. We take a look at both sides of the commercial investment argument and ask which is right for you.
In a sector where occupier demand is rising and supply is falling [RICS Q4 2015: UK Commercial Property Market Survey] commercial property is still seen as a popular investment. Forecasts for total commercial property returns are set at around 8.8% for 2016 and while some fear that the London market may be undergoing ‘yield compression’ other areas of the country are experiencing strong rental growth.
Investors who wish to maximise income through renting commercial properties such as industrial space, office space, student accommodation, retail space, land or, even in some instances, car parks, have a choice at which level they enter the market; prime property, will command the highest purchase price but also the highest rental yield; secondary and tertiary properties will cost less to buy but will be in locations where rents will be lower and top-quality tenants harder to source.
According to some estimates, secondary and tertiary retail is actually outperforming prime London retail rental by at around 8% so there are substantial gains to be made in less ‘fashionable’ areas. Astute investors, therefore, should be on the lookout for properties in locations which are up-and-coming and which are subject to possible regeneration – a search on the website of the council in the area that you’re considering purchasing in will detail all regeneration plans, giving you an idea of where to buy for maximum future benefit.
If income generation is your major driver when investing in commercial property, you need to balance the benefits of a long-term tenant with a secure lease whose rent rises annually and in line with inflation (thereby establishing a secure and regular income) against those times in between tenancies when the property may be lying empty and not realising any returns whatsoever.
If you prefer the idea of long-term gains, you may be more interested in the capital appreciation of your property than its rental income, especially if you’re experiencing a dearth of tenants or your property is in an area which is still feeling the repercussions of the 2008 crash.
Valuing a commercial property can be fraught with difficulties and valuations rely on the amount of rent the property can generate and the desired rate of return. However, you can maximise your capital through shrewd behaviour to put you in the best position to sell when the time is right. Research the area before your purchase to ensure that you gain an insight as to whether it’s on the up, merely stable or in decline. Long-term planning can benefit you enormously and guide you as to when is the best time to sell to ensure the highest possible rate of return on your investment.
For advice on any aspect of commercial investment, purchases, sales and leases, contact the Eddisons team. Our experienced and professional staff are experts in commercial property valuation and can offer you impartial and confidential guidance to assist you with your investment portfolio.
Written by: Steven Jones on Tuesday 12/04/2016