If you are reading this Blog chances are that you have already decided that you intend to purchase a Commercial Property whether that is for your business operations, property development or investment purposes. You are also probably beginning to realise that Commercial Property acquisition is quite different to most people's experience of buying their own home and no doubt you aren't quite sure how to start or more importantly how to avoid the pitfalls. If so, congratulations you've come to the right place! Read on for my Top 10 Tips.
Earlier this year I had the pleasure of being a keynote speaker at the #Kickstart2017 Commercial Property Insight event provided by the Royal Bank of Scotland and prepared for those entering into the commercial property market for the first time. For those who were unable to attend, don't worry my Top 10 Tips is derived from the presentations delivered which were found by attendees to be "of great interest" whilst "the content delivered was highly informative". I hope you think so too!
So with that, here are my Top 10 Tips to follow BEFORE buying your first Commercial Property:
Top Tip 1 - Finding the right property - Location
Perhaps the most important factor when searching for the right commercial property is location. Get this wrong and it's a difficult one to recover from.
A great location can often be thought of as property within a desirable or marketable area but what does this really mean? Well, in simple terms it's an area where demand is high and outstrips supply. In practical terms, the real key to understanding this in commercial property terms is to physically walk the streets and area surrounding any building being marketed that you may be interested in.
Red flags can be raised immediately on doing this and some examples may be the street being littered with "to let" and "for sale" boards affixed to commercial properties. In a high demand area typically all units would be occupied so if an area has for instance a number of empty retail units this would typically signal that the market supply is not there, a worrying aspect.
A further Red Flag is the length of time that a property has been on the market for. A property in a "good" location would typically be capable of being let or sold within a short timeframe, so if a property has been on the market for a long time then I'd suggest being extra cautious and carry out further due diligence before jumping in.
Top Tip 2 - How to find the right property
Finding a property is easy, isn't it? It's common knowledge that a quick search on the internet will reveal a number of property listing sites containing all commercial properties for sale within whatever area you desire. But wait a minute, here's an insider tip... they won't!
A considerable number of commercial properties change hands without ever hitting the open market and as such without ever being mentioned on the internet at all. Indeed, many, many properties are only put onto the open market if not snapped up prior to this from off market activities.
The truth of the matter is that most property agents and surveyors will in essence pre-release to known contacts and organisations they know are interested in the property in question i.e. a targeted approach.
So I'd suggest preparing brief requirements i.e. property sector, size (square footage), location, yield range, whether you are seeking vacant possession or a let property and then sending these to commercial property agents/surveyors. The RICS website is a good place to start to find surveying firms whilst a search on each firm's website should outline a commercial property agent to allow you to contact directly.
Don't forget if you are a new contact to the property agent to follow up every now and then to ensure you are and remain on the list whilst ensuring that they have your requirements for matching.
An alternative is to appoint a property agent yourself, furnish them with your requirements then sit back and let them do all the hard work. Some agents may even work on a fee commission basis where you only pay them a fee if you buy the property.
Top Tip 3 - Specialise in a Property Sector
Commercial property is split into various sectors including office, residential, industrial, retail, licensed trade and leisure. Each sector is unique and one of the keys to success of any commercial property investment is to fully understand the sector you intend to invest in.
So whilst most publications and certainly large property funds will talk about diversification of risk by investing across a range of property sectors, my advice to a smaller or start-up investor would be to specialise in one sector.
By doing this your market knowledge will increase, you will become familiar with what tenants are looking for with a property, what locations are best, what constitutes a good property layout, as well as understanding statutory considerations relating to the property specific to the sector. In addition, with increased experience time savings can be obtained and the property selection stage and due diligence processes streamlined considerably.
Top Tip 4 - Determining Value of the Investment
So how do we determine the value of the investment and specifically how do we compare different commercial property investments? In short, we calculate the "yield". Put simply, the yield on the property is calculated as the annual return on the capital investment and is usually expressed as a percentage of the capital value.
Many newbies often question why more emphacise is placed on property yields or returns as opposed to overall capital values... the answer to this is fairly straightforward. Capital values on property investments can only really be generated by reviewing recent, comparable transactions of similar properties in similar locations. Property yields however are easily compared across a platform of properties and because of this, it is common practice to apply a percentage yield figure as a multiplier against a property's annual rental income as this will help to build an estimate of the capital value of the property.
In general terms, we might expect to see lower yields for say modern properties in a good location with a good market demand whereas an older property in a secondary or tertiary location with a more questionable demand is likely to attract a higher yield given increased risk and possible expenditure requirements.
For example, a Grade A office building in a prime City Centre site and let out to say a well known global company on Full Repairing lease terms over a 15 year lease term will likely attract a low yield, say 5% however, in comparison an aged industrial unit within a tertiary area and let out to a small local sole proprietor on a relatively short lease could generate yield approaching 12% or more.
Top Tip 5 - Look for the Potential to add Value and Capital Growth
What differentiates great property investors from the rest is the ability and knowledge to find potential to add value and capital growth where others cant.
For example a property acquisition for investment purposes with a sitting tenant could allow an assessment of the current rental to establish if this is undervalued and whether there is an upcoming Rent Review clause (typically every 5 years in commercial leases), to allow increased rental returns to be achieved. In all situations involving a tenancy, proper Due Diligence should highlight rental levels of similar properties in order to factor conservatively future gains which can increase the yield.
Longer term strategies for the site also need to be considered including thinking "out of the box". For instance, what is the Planning Use of the building and is there an alternative use class to consider that may attract higher returns. An example may be a small retail unit on a high street that could apply for hot food consent, possibly demanding a higher rental. Another example could be a well cited industrial estate close to the city that could be demolished and turned into residential.
Top Tip 6 - Condition
Having been involved in property my entire career, I have seen countless examples of a poor acquisition where costly condition related aspects of the building such as significant and very costly repairs have remained unknown due to a lack of due diligence and unnecessary risk taking.
Of course, most readers will be thinking that a surveyor would say that wouldn't they?! It is true to say that a survey may not provide any enlightening view on condition that was not evident to yourself from viewing the property. However, it is also true to say that many surveys do reveal costly unknown issues that either result in an acquisition not progressing or alternatively a "price chip" occurring.
I have often been asked in relation to establishing the condition of a property "do I need a survey?". The truthful answer lies in the risk dispositi