If you’re reading this article, it’s likely that you’re thinking of renting or buying a commercial property. The question is: are these types of property transactions good investments?
In this article, we explain the ins and outs of renting property, reveal whether it’s better to buy or rent, explain what it takes to purchase and rent commercial property, and more.
What Is a Commercial Property?
A commercial property is a premise that’s used for conducting business activities (as opposed to residential use).
The Town and Country Planning (Use Classes) Order 1987 provides examples of commercial properties in its Schedule. That legislation categorises commercial property into classes like food and drink, shop, storage or distribution, and so on.
Neither buying nor renting commercial property is better than the other, as both options have their pros and cons, as shown below:
|Buy||You can sell the property at a profit in the future.You can earn rental income from it.You can put it up as collateral to secure financing.It comes with tax benefits.You can make adjustments to it as you see fit.||It requires a huge amount of capital.It comes with ongoing maintenance costs.You’ll tie up your money in the property.|
|Rent||You don’t need as much capital for a lease.You have fewer maintenance costs.Your money isn’t tied up.You can relocate your business if necessary.||There are ongoing rental costs.There is no opportunity for capital gains.You need the landlord’s permission before you can make adjustments to the property.|
The procedure for purchasing commercial property in the UK typically goes as follows:
- The buyer or their agent identifies a commercial property worth investing in.
- They secure funding (through savings, a loan, etcetera).
- The parties negotiate the terms of the transaction.
- A property valuer may value the property.
- The parties’ respective property agents prepare a document called heads of terms.
- The buyer conducts due diligence to ensure that the property is watertight and in good condition.
- The parties’ legal advisors prepare transaction documents.
- Negotiations conclude, and the parties exchange contracts.
- The transaction ends with the parties signing and dating the conveyancing document or lease.
- The buyer registers the transaction document at the Land Registry and pays the Stamp Duty Land Tax.
Depending on factors like the buyer’s schedule, the value of the transaction, and the duration of negotiations, the above-described procedure can take weeks or months to conclude.
You can rent a business property by following the steps below:
- Find a commercial property you’d like to rent.
- Hire a legal advisor (or consult with your lawyer).
- Negotiate the Heads of Terms with the landlord or their agent.
- Once the negotiations conclude, sign the heads of terms and forward a signed copy to the landlord or their agent.
- Receive a draft lease and rent deposit deed (among other legal documents).
- Sign the lease and pay the requisite deposit.
Once you find a property, get negotiations out of the way, sign the paperwork, and make the necessary payments, you can take possession of the property and start conducting your business.
The factors that affect a commercial property’s price include its:
Other factors that may play a role include the state of the economy and lending interest rates at the time of the transaction.
The average price of commercial property in the UK is £325 per square foot.
According to the SME consulting firm Bionic, England’s South East has the priciest commercial property prices, with an average of 15 million pounds or more. In contrast, Scotland has the least expensive commercial property prices. Some of the properties there go for under £100,000.
Yes. There are several websites you can visit to find out how much a commercial property was sold for in the UK. Some of the sites worth visiting include the UK government website, the Land Registry, and Rightmove.
The requirements for purchasing commercial property are as follows:
- Exchange of contracts
- Deposit payment
- Commercial licence registration
- Payment of stamp duty land tax within 30 days of the transaction’s conclusion
Please note that the above list is not exhaustive.
Knowing whether you’re buying a good property requires knowledge of what to look for. Pay attention to the factors listed below:
- On-premises facilities
- Profit potential
If the property ticks all the boxes, it’s a winner.
- Proximity to transport infrastructure
- Market condition
The best place to buy commercial property is through an estate agent. Other notable options include:
- Private sales
- Online real estate marketplaces
Some of the leading companies you can purchase commercial property from in the UK include:
- Knight Frank
- Savills; and
- Atlas Real Estate Ltd.
You can also visit websites like Rightmove and sold.co.uk to find listed properties.
The additional costs associated with buying a commercial property include:
- Stamp duty land tax
- Business rates
- Legal fees
- Renovation costs
- Utilities and other ongoing expenses
Stamp duty land tax and business rates are legal requirements. The rest may vary and are at your discretion.
Yes, if you buy a property that costs £150,000 or more.
The charge for properties valued between £150,000 and £250,000 is two per cent, while anything higher attracts a further five per cent duty.
It depends on whether you own the commercial property personally when you sell it or if you hold it through a limited liability company.
If you sell a commercial property personally, you’ll pay capital gains tax. However, if your limited company is the holder, the government will charge it a corporate tax.
Buying a commercial property requires capital. This section examines the types of commercial real estate loans.
A commercial mortgage is a loan whose purpose is to finance the purchase of a commercial property.
- Flexible repayment terms (1-25 years).
- Capital repayment holidays.
- The deposit is usually 30% of the property’s value.
A commercial buy-to-let mortgage is a loan you secure using commercial real estate.
- Your commercial tenants can repay the mortgage.
- Tax advantages.
- You need to have an existing commercial property.
A development finance mortgage is a loan used to renovate a commercial property or convert a residential property to a commercial one.
- It’s the best mortgage type for property developers.
- It’s a short-term low-capital loan.
- It takes longer to recoup mortgage costs.
A bridging loan is a short-term loan that bridges the gap when you need to finance one transaction and are waiting to receive the proceeds from another.
- It provides an immediate cash injection.
- They don’t attract early-repayment charges.
- High borrowing costs.
Auction finance is a bridging loan secured to buy a commercial property at auction.
- It provides a quick capital injection.
- The loan is short-term.
- You need to put down a higher deposit to get lower interest rates.
A commercial remortgage is a loan used to refinance a commercial property.
- You can borrow huge sums.
- The interest rates are lower and tax-deductible.
- It attracts plenty of fees.
Asset-based lending is a loan secured against assets on a company’s balance sheet.
- The loan facility is flexible.
- It’s a stable loan due to fixed terms.
- Early repayment and default charges apply.
Cash flow financing is a loan whose purpose is to keep a business liquid while it’s waiting for late payments to come in.
- It provides a stopgap when your business is struggling with late payments.
- These loans have multiple uses.
- These loans attract high-interest rates.
The legislation and regulations that are relevant to commercial property in the UK are the Landlord and Tenant Act 1954 and the Town and Country Planning (Use Classes) Order 1987.
The Landlord and Tenant Act regulates dealings between landlords and tenants in relation to residential and commercial properties. It governs leaseholds.
The Town and Country Planning Order defines and regulates commercial property in relation to how they’re used.
Yes, you can inherit a commercial property, but we recommend seeking the advice of a solicitor for proper management.
It depends on whether you own or rent the business property and what your lease agreement says if you’re renting.
If you own the property, you take care of maintenance. If you’re leasing, your landlord does. The exception is if your lease agreement states otherwise.
Yes, it can be when you know what you’re getting into. The pros and cons are as follows:
- Recurring income source
- High-profit potential
- High investment cost
Commercial property investing can be lucrative when you know what it entails. When in doubt, it’s best to consult commercial property experts so you’re clear on the opportunities and risks involved.
If you have an existing commercial property and need damp-proofing assistance, contact Watertight Homes. Call us today at 07843 099 906 to get a quote.