Investing In Commercial Property in The UK?

The key to success for investing in commercial property in the UK or for anywhere else for that matter is

Location,

Location,

Location!

bank

You can remedy everything else, an unreliable tenant, poor physical conditions, or unfavourable lease terms, but you can't change the location of your property.

I've seen too many investors look first at the strength of the tenant (covenant), before they even consider the location or inspect the property. They don't even know whether it will be adaptable to meet the needs of the market at large.

For example, private investors too often purchase high street banks in small towns around the UK.

They even take secondary positions, reasoning that the bank will be a tenant indefinitely.

Banks across the UK are raising cash from their freehold properties. They do this by selling them to investors and then leasing them back at the full market rental price. This leaves no room for the rent to increase until the subsequent rent review date.

My concern is that the bank's intention is to vacate the premises after the lease expires. This would leave the investor with a vacant commercial property that would be unsuitable for most retailers. The only way to remedy this would be for the investor to take on large conversion costs.

However, converting commercial property is a job that most investors want to avoid.

On the other hand, purchasing a shop that is adjacent to a bank with a major retail covenant is a much better investment. That type of commercial property is also more suitable to many different kinds of retailers. This is better not only in terms of location, but also in terms of the financial yield. You could secure this investment at a yield of 1% more than that of the bank.

Take a look at commercial property auctions in the UK, and you'll find hundreds of bank investments that are for sale.

Ask yourself why these banks are selling their assets

Remember, these are the factors (listed in order of priority) that should be considered when you want to make a profitable commercial property investment in the UK: 

  1. Location 
    This is the one factor you cannot change.
  2. Property Characteristics 
    Do the property characteristics suit a large number of retailers? Can it be converted easily without a large cash outlay? Is the building listed or located in an area where conversions are allowed?
  3. Tenancy 
    How long is the lease, and is it on FRI terms? Has the rent review clause been properly drafted? Does it have good title?
  4. Covenant 
    Who is the tenant? Does the company own other assets? Will it keep the building in good repair? Can it survive an economic downturn?
  5. Condition 
    What is the structural condition of the property? Will the tenant carry out minor repairs? Be sure to conduct a thorough survey of the building before signing any contracts.

The above factors also apply to commercial properties located anywhere around the world.


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