When thinking about investment property, most people think about residential property, rather than commercial property investment. However, commercial property investment can be just as profitable as residential property, perhaps even more so. Many people overlook this market because they don’t think they know enough about it, or because the cost of commercial properties is higher. If you want to know more about commercial property investment and its benefits, then here are a few tips:
What is commercial property investment?
Commercial property investment is just like residential property investment, but involves different types of property. The main commercial property categories are:
- Retail property, including shops and supermarkets
- Office property, including standard office buildings and business parks
- Industrial property, including warehouses and industrial estates
There are other properties in the commercial sector that do not fit into these categories. For example, hotels, cinemas and pubs are part of the leisure sector. However, most commercial property investment fits into these three common categories.
Why commercial property investment?
Investment in commercial property has a wide range of benefits, including:
- Income yield – the income yield for the commercial property market has been locked between 5% and 8% for around the last ten years. This is a much higher percentage than shares or gilts, which are around 3 or 4%. This makes commercial property investment an attractive form of investment.
- Diversification – if you have a large investment portfolio, a good way to minimise risk is to diversify into different areas. Commercial property is one such area, and allows you to invest in something other than stocks and shares, meaning you are less likely to lose all your money at once.
- Less volatile – the commercial property market has been much less volatile over the last twenty years than the stock market, with only three years out of twenty having negative returns, compared to five years for the stock market. This is due to the high level of income, which makes commercial property investment similar to items such as fixed rate securities.
- Tax – there are a number of tax benefits to investing in commercial property. The most important tax benefit is that the interest on any loan used to buy the property can be offset against rental income, meaning if you borrow money then you will pay very little tax on the money that you make.
Despite all these benefits, there are risks involved in commercial property investment. Although commercial property investment has higher returns than residential property, the risks associated are usually higher as well. In addition to this, the steady past performance of commercial property investment seems to be slowing down, and analysts are unsure as to whether the market will continue to be strong in the future. The main risks involved in commercial property investment are:
- Capital intensive – commercial property can be very expensive, so there is a lot riding on the quality of your investment. There is less room for diversification within the sector unless you have large amounts of capital at your disposal.
- Tenant default – although the income from commercial property is high, there is always a risk that the tenant will default on the lease. This is increasingly becoming a problem, with many high street retailers defaulting on leases as they go out of business due to high levels of competition. However, it is possible to regain the income stream by re-letting the property, although this can take time.
- Low liquidity – the value of commercial property can be greatly affected if you need to sell quickly.
- No definite value – because property prices are generally decided by the opinions of experts and not the pure market forces of supply and demand, the property has no definite value. The only way to truly know what the property is worth is by selling it. This means prices can fluctuate fairly often, and this may mean you can lose money when selling.
Although there are many risks involved in commercial property investment, it is still one of the most profitable investment sectors. If you find the right commercial property investment, you will get a good return from your investment.