Guide to buying commercial property

Should I buy commercial property?

The first question to answer is why you want to buy commercial property, as that will determine the type of property you should choose and the return it will generate.

There are two reasons people purchase commercial property:

As an investment

If you’re buying a commercial property purely as an investment, you can choose from a wider range of property types and locations. In this case, you should consider things like tenant demand in the area for particular property types, rental values and the increase in property prices in different sectors.

Before you decide on a property, make sure you have a clear plan for your investment. For example, will you renovate the property and sell it at a profit or find a long-term tenant? Having a plan in place before you start looking will help you find a property that meets your specific investment needs. 

For business use

If you want to buy a commercial property to run a business from, the main advantage is that you’ll pay a mortgage rather than rent and build equity in the property. Eventually, you’ll own the property outright and have a profit-making asset you can sell, let or use in the future at minimal cost.

In that case, you’ll need a property that suits your intended use, potentially gives you room to grow and is in a location that makes sense for your business. When choosing a location, think about whether you’ll need access to footfall, good transport links, proximity to suppliers, parking for your staff or all of the above. 

What are the different types of commercial property in the UK?

The sheer variety of commercial property can be a blessing and a curse for first-time investors. The benefit is there’s likely to be a property that meets your criteria and budget, but it can also lead to indecision and confusion.

UK commercial property types include:

• Office buildings - Properties designed for professional and administrative work, including business centres, offices and co-working spaces.
• Retail space - High street shops, shopping centres and other properties used for retail trading.
• Industrial properties - From small individual units and light assembly facilities to warehouses, distribution centres and factories.
• Hospitality and leisure - Restaurants, pubs, cafes and leisure facilities such as entertainment centres, soft plays and gyms.  
• Healthcare facilities - Medical centres, nursing homes, hospitals and clinics.
• Mixed-use developments - Properties that combine commercial and residential components, such as a flat above a shop. These are becoming increasingly popular investment options.
• Rural and agricultural - Land and farm buildings can be a good investment for the right buyer. 

As an investor, it can be beneficial to buy a property in a sector you have some knowledge of. That will give you an insight into what prospective tenants need and look for. 

How much does it cost to buy commercial property?

Once you have a suitable property type in mind you can then consider the costs. You will need a deposit to buy a commercial property of around 20-40% of the purchase price. Most buyers then use a commercial mortgage to pay the remainder when the deal completes.

The average price of commercial property in the UK varies according to property type and location. However, as a rough guide, the average price per square foot for investment sales is around £330, falling to £220 for owner-occupiers. London, not surprisingly, has the highest average purchase price of £1.6 million, while North East England has the lowest at £350,000. However, the purchase price is not the only cost to consider. 

Initial costs

You pay Stamp Duty Land Tax at 2% of the purchase price between £150,000 and £250,000 and 5% on values above that amount. Most buyers also need professional assistance from property agents, solicitors and surveyors, with each charging a fee. You may also have to pay a fee to arrange a commercial mortgage.

Set up costs

Once you’ve bought the property, there are further costs including renovating or refurbishing it, fitting it out with furniture and equipment and the associated moving costs. You may also need to install or upgrade systems such as the heating and plumbing. 

Ongoing costs

You’ll also have to pay business rates if you occupy the building or do not have a commercial tenant after three months. Insurance, energy, maintenance and services such as security and cleaning are other significant expenses for commercial properties, and these will fall on you if you don’t have a commercial tenant. 

How to buy commercial property

One of the biggest questions for commercial property investors is how you’ll finance the purchase. If you have the capital to buy the premises outright, that’s great, but that’s not a position most investors are in. So what are your options?

Capital spend

If you have the capital to buy the premises outright, it’s quick and there are no financing costs to worry about. It also gives you extra leverage when negotiating a deal. The downside is that you are tying up cash that could be used to grow your business or as a deposit on another property so you can build your portfolio. 

Commercial mortgage

A commercial mortgage is the most common way to finance the purchase of a commercial property. You’ll usually pay a substantial deposit and then repay the mortgage over a term of anything from five to 30 years. There are commercial owner-occupier and investment mortgages available with varying interest rates. 

Bridging loan

A bridging loan is a specific type of short-term loan that’s commonly used when buying commercial property. It provides quick financing at short notice but at higher interest rates than a mortgage. If you use a bridging loan, you should have a refinancing method in mind, such as a commercial mortgage, to pay off the loan quickly. 

Auction finance

It’s common to buy commercial properties at auction as it can be a quick and effective way to secure a property at a good price. When you purchase a commercial property at auction, you must pay the full price within 28 days. Auction finance can help you fund the purchase while you arrange a commercial mortgage. 

The pros and cons of buying a commercial property

The pros

• Long-term leases provide income stability
• Yields tend to be higher than residential property
• Can be a useful way to diversify an investment portfolio
• The property can increase in value, particularly if you secure high-quality tenants
• A wide range of property types can suit every investment goal and budget

The cons

• It’s a long-term investment and commercial property does not tend to appreciate rapidly
• The costs of buying and maintaining commercial properties are typically higher than residential
• The risks can be higher as commercial properties are sensitive to market conditions
• Buying and managing commercial properties can be complex and may require specialist knowledge 

How we can help

At Eddisons, our commercial property agents have the experience, local knowledge and market insights to help you buy commercial property that meets your specific needs at the right price and in a favourable location. Read more about our commercial property agency services, view our commercial properties for sale and get in touch to discuss your investment goals with our team.