Much of our association with property is of the residential variety.
The property we live in (whether owning or renting), the daily news about house prices and mortgage rates, the boasts and grumbles in the local bar, the Spam email highlighting this or that new opportunity.
It’s why Tailor My Property exists as a consultancy - how does one navigate through this fog of information to get to the right choice of purchase, and how might that purchase be financed?
But the other side of property to housing buyers and tenants - commercial real estate - is also significant. It can tell a tale in its own way about a country or region’s economic status, the job market, internal investment, and moves by companies small and global.
Above all, this sector can offer up opportunities for the investor.
Let’s step back to capture some basics. Commercial real estate is the accommodation for companies. A company can own or rent where it conducts its business - just like in the residential space.
Commercial is split into three main categories: industrial, retail and office. You can likely envision which type of owner or tenant will use each category. There is also a fourth category, that captures the wide variety of other non-residential properties - from restaurants and galleries to hotels, care homes and health clinics.
Investment into commercial real estate globally has risen 2.9 per cent in the last five years to top US$ 4 trillion at the end of 2018, according to IBISWorld, while a report by Grand View Research estimates this to grow to 4.263 trillion by 2025.
The UK commercial real estate market is worth more than GBP 500 billion, with half of that in Greater London.
Major companies research long and hard as to where to plant their base of operations, and they are some of the biggest investors in the sector. Major players like Amazon and H&M, as examples, have made significant investments in warehouses and offices in Eastern Europe, where land rates and construction costs are lower but the local workforce is skilled.
Beyond companies buying for their own operations, commercial real estate can be invested into either directly in one’s own name, through a corporate structure, or through a variety of vehicles that build a portfolio for diversification purposes, such as Real Estate Investment Trusts (REITs), unit trusts, and funds.
Let’s focus on the opportunities for individuals or small investor groups.
Returns for the investor looking to lease a commercial unit or building derive from the rental yield and the price appreciation over time - the capital gain.
One strong attraction of commercial real estate is the leases to tenant companies tend to be longer - an average of seven years, but can be as long as 25 years. This makes for a more ‘sticky’ tenant - companies tend to have a greater challenge moving premises than the average individual renting an apartment.
This helps make your rental income that much more stable and predictable.
Rental returns combined with capital appreciation also can be compelling. Wesleyan Assurance Society cited an average 7 per cent annual return in UK commercial real estate in the 25 years up to 2014. Research from Real Capital Analytics found that returns in Europe’s major cities have risen between 40-50 per cent since 2013.
So what are the important considerations?
If buying in the UK, the first consideration would be to check the credentials of any broker or intermediary assisting with the sale. The Royal Institute of Chartered Surveyors (RICS) has published its details guidance for those acting as commercial real estate agents. A strong track record in this space should be apparent.
The second issue might be financing options. Cash purchases are simple, though commercial loans are also available.
Some European countries are off the table for mortgage options even for regular house purchases from abroad - Italy is presently a good example. Others may see mortgage options come and go from their national banks, such as Ireland and France.
The UK has around 15 banks and building societies that will lend to individuals buying houses, but the number of lenders for commercial real estate is far lower.
Initial rates tend to be higher, with terms typically shorter. The monthly mortgage repayment therefore needs to be factored in when calculating the prospective net return from a commercial purchase.
Tax is another consideration. From April 2019 commercial real estate purchased by a non-resident buyer will be subject to capital gains tax (CGT), according ton the latest government brief - just as is applied to residential purchases. Non-resident corporate entities will be subject to corporation tax upon selling the property.
The fourth consideration is the property itself. Offices are arguably the commercial sector with the widest possible target of tenants - the majority of companies are desk-based. Industrial spaces such as warehouses can also attract a wide variety of renters requiring storage.
By contrast, some commercial opportunities either have internal set-up, or are in certain locations, that would attract a narrow number of tenants, such as certain types of manufacture. Owners of hotel buildings (where the hotel brand itself is not the owner) has few options than another hotel brand if its tenant company moves out.
So there is a number of things to consider if looking into the sector.
Let start the conversation............
As with residential property, Tailor My Property keeps abreast of commercial real estate in the major markets, learning of opportunities.
As with residential investments, we can get to the heart of your plans, can weigh up options, access solid end providers and on-the-ground intermediaries, bring in the lending options and generally run the numbers on the net returns and cash flows to give that clarity.
Feel free to get in touch with through the ‘Contact’ tab on the homepage.