How to Invest in Commercial Property

If you're a property investor looking to diversify your portfolio, then now may be a good time to try your hand at commercial property investment. In early January, Kyle Caldwell wrote that the commercial property market is set to deliver double-digit returns in 2014, and data from the Investment Management Association (IMA) shows that investors put more cash into UK commercial property funds in June 2014 than in any month since 2009.

The financial crisis of 2008 may have slowed down activity in the sector, but all that pent up demand is now being unleashed. Combine this with increasing interest from foreign investors, particularly from Europe and Asia, and it's no surprise there's been such an improvement in returns. Here are a few pointers for those looking to get in on the act.

First off, what exactly is a commercial property?

For the uninitiated, investing in commercial property means that you're buying a property which will be used solely for business purposes. As with a residential property purchase, you will probably need to obtain a loan from a bank, and find a tenant to occupy the property in order to generate income in the form of rent. The difference is that the tenant comes in the form of a business organisation, rather than a private individual.

The advantages of such an investment include:

• More reliable rent: Since it's a corporate entity paying the bills as opposed to an individual or family, there's more chance of the rent arriving on time.

• Longer lease: The lease for a commercial property usually runs around 10 to 20 years, meaning you won't have to go out and find new tenants every year or two.

• Lower maintenance costs: Most commercial properties require the tenant to sign a full Repair and Insuring Lease, meaning they will be responsible for the costs of maintenance on the building. So there'll be less need for micromanagement on your part, not to mention lower operating costs. Just make sure you get the tenant to sign the agreement before they rent the property.

How to Invest in Commercial Property

According to which.co.uk, there are three ways to invest in commercial property. They are:

• Direct investment: You simply buy all of the property, or a share in it. This will be too expensive for most people, and too risky; but those who can afford it will have the lion's share of the income.

• Indirect investment: You invest in the property's shares, rather than in the property itself. This is preferable for those who would rather try their luck on the stock market.

• Investing in property funds: Otherwise known as “Bricks and Mortar”, this means you participate in a collective investment scheme, such as unit trust and Oeic. This is the best way for smaller investors to get involved in commercial property investment.

What should you look for in a commercial property? Here are a few important factors to take into account.

The type of property

Office buildings secure the most reliable tenants, and they'll always be in demand regardless of economic climate. So they should be your first port of call in most cases. However, there are other options for commercial property investors, including:

• Leisure: Hotels, restaurants, cafes, sports facilities, etc.

• Retail: Shopping centres, stores.

• Industrial: warehouses, factories, etc.

• Healthcare: Hospitals, nursing homes, etc.

Location

A good location is key; but what qualifies as a good location depends on the property type. Commercial property investors will want to look for properties located in business hubs, or that are at least easily accessible from business centres.

Still have questions about commercial property investment? Don't hesitate to seek professional advice from commercial property industry experts.

Disclaimer: The information and data provided are for general information purposes. They do not constitute investment advice nor can they take account of your own particular circumstances. If you require any advice on investments, you should contact a financial or other professional adviser.

Featured image "New Court / Looking up" via George Rex

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