By: Martin Slowe
2018 is the year of alternative property investment with an increasing trend for investors exploring new opportunities on the market.
The uncertainty that Brexit negotiations bring is attracting more investors to the increased stability of commercial properties as opposed to residential properties. In particular, there has been a soaring interest in 2018 in alternative investments such as hotels and student accommodation. In fact, the alternatives are becoming mainstream.
The launch of Crossrail has created many commercial property investment opportunities - with towns such as Slough and Brentwood predicted to be a great return of investment.
The popularity of online retail has also created commercial property opportunities with the increased demand for retail warehouse space to supply online shoppers. Investment in online shopping storage will only go up - it’s boom time in this area.
Often described by experts as a more stable investment than residential buy-to-lets, the business case for commercial property is clear.
Commercial property is a great way of diversifying your investment portfolio. Investors are turning to commercial property as it offers a more stable investment when compared to residential with long leases typically between 8-15 years. Commercial property also has a guaranteed lease income and business tenants are less likely to default on rent payments.
Landlords of commercial property also benefit from increased reliability with regard to occupation. Once a business is established in a certain location they may ch
oose to extend their lease and stay for many years or even decades.
Commercial landlords receive increased yields. Residential landlords are generally required to take on the cost and responsibility of ensuring and maintaining the property, and the fact that commercial tenants usually provide for these things results in greater after cost return on investment for the landlord.
Like residential landlords, buyers must pay stamp duty land tax when purchasing a commercial property. However, commercial landlords benefit from a slightly raised threshold in comparison. A commercial property valued below £150,000 is exempt from stamp duty, as opposed to a £125,000 limit on residential properties.
The reduction of mortgage interest relief for residential properties has also decreased the profitability of buy-to-let for landlords. The changes have led to twice as many landlords taking out commercial loans, to which the same reduction to base income tax rates do not apply.
So you have your eye on a commercial property investment, what are your responsibilities?
The unique requirements of a commercial property landlord
As a commercial property landlord, you will be required to maintain health and safety measures for the safety of your tenants.
You will also have to keep to industry regulations for energy performance, fire, and asbestos.
- Electrical certificates and energy performance certificates (EPCs)
You are required by law to have a valid electrical safety certificate and energy performance certificate by law. It is your responsibility to make sure that these certificates are valid.
An energy performance certificate (EPC) rate the energy efficiency of the commercial property from A-G (G being least efficient). This certificate is valid for 10 years on a commercial property. If you don’t have an EPC on your commercial property then you could be fined up to £5,000.
The electrical certificate will prove the commercial premises has passed all the electrical safety compliance checks. This certificate will cost you from £150 - £1,080 depending on the size of your commercial property.
- Management of maintenance and repairs
Most of the responsibility for the maintenance and repairs of the commercial property is with the tenant - the details will be stated in the lease as ‘Fully Repairing and Insuring’ (FRI).
However - the maintenance of the exterior of the building and any costs that are relevant to safety is the responsibility of the commercial property landlord. It is therefore essential that you survey the condition of the building before you invest in it and also before a new tenant starts leasing the space.
Fire risk assessments on commercial properties
Fire risk assessments will need to be:
✔ Frequently reviewed
✔ Documented - if the fire service has issued alterations or certification
✔ Legally recorded (if the business in the premises employs more than four people)
✔ Recorded - especially any actions that need to be taken
All commercial premises must have a fire detection system that must be serviced twice a year and tested every week. There must be a call point on every floor and every person in the building must be able to hear the fire alarm.
Commercial properties such as restaurants are considered at high risk of fires so they must have an automatic fire alert system.
- Asbestos management in commercial property
Airborne asbestos particles are extremely dangerous. As the landlord of a commercial property you are responsible for making sure that any asbestos on the property presents no risk to those working or living in the property.
The failure to do so can result in:
- Up to 12 months in prison
- A fine of up to £20,000
In a severe case of failing to deal with asbestos, a commercial landlord could face up to two years in prison and unlimited fines.
It is vital that you task an accredited surveyor to complete an asbestos survey of the property. Even if your commercial property sits unused for periods of time during the year, you still need to get it surveyed during this time.
Areas to check for asbestos in a commercial property include:
- The insulation, including coatings
- Textured coatings
- Ceiling Tiles
- Cement
If there is any asbestos found in the survey, you must then have the results of the survey analysed and recorded. There then has to be a health and safety assessment of the property and any asbestos seen to be risky needs to be safely removed.
You must then continue to check any remaining asbestos and make sure that tenants know about the asbestos and take any precautions. You also need to tell anyone employed to do any building work on the property so that they are aware as well.
- Commercial property insurance requirements
It is your responsibility as the commercial property landlord to provide property insurance in event of any damage to the property.
Within a tailored policy for your commercial property you can opt to cover:
✔ Structural damage as a result of fires, storms, floods, vandalism or burglary.
✔ The loss of rent if a tenant can’t occupy the property due to damage.
✔ Damage as a result of an act of terrorism.
- Commercial tenant services
You will also have responsibilities to the tenants of your commercial property, including:
- Rent collection
- Rent reviews
- Chasing late rent payment
- Lease renewal
- Lease assignments
- Lease renewals
The steps that are required of you as a commercial property landlord to make sure your property is ‘fit for lease’ are based around paramount safety for your tenants and their customers and the usual dose of common sense.
If you are satisfied that you can meet all the requirements that commercial property investment entails then you will be able to take advantage of the opportunities that are arising in 2018 and renting out your commercial property should be pain-free.
Commercial property investment offers great opportunities to value-add and for investors to look to change short-term income into long-term.
The commercial property offers an attractive middle option to savvy landlords that efficiently balances risk and return while providing cash-flow to your portfolio.
The Property Voice Insight from Richard Brown
There is usually both a 'push' and 'pull' effect in property, just as in other walks of life. Right now, we are probably witnessing something of a push-effect, as residential landlords are being increasingly squeezed by Government policy and tax changes. This has opened up interest in alternative property investment opportunities, with commercial property being one such opportunity.
This article falls into two parts: opportunity and responsibility.
From an opportunity point of view, there are several things that appeal with commercial property investment. These include, more stability with longer-term leases, more advantageous tax treatment when compared to some aspects of residential property investment (stamp duty and mortgage interest relief being two) and the ability to pass on many of the operating costs of managing the building (through FRI leases as stated above). I would temper some of this just for balance, such as the potential for longer voids between tenancies and a closer link to the wider economy, or at least the sector economic conditions than is often the case with residential property. For example, high street retail is going through a torrid time right now. For this reason, it is best to start slowly and surely, perhaps even with mixed-use properties (flats above shops) or commercial-that-looks-like-residential alternatives (student accommodation, care homes, etc.).
With commercial property, as with residential property, there could be a boost due to major infrastructure projects and inward investment into local areas and regions. Examples of this include Crossrail & HS2 as infrastructure projects and urban regeneration such as with Liverpool, or Hull say. The ripple-effect for commercial property development and investment should be clear to see. In fact, there are often waves of capital growth that can arise here too. The first wave is around the announcement of the project, the second wave is around the launch and the third wave is when there is greater demand following the launch. Slough is mentioned here, linked to Crossrail, which is now in the third wave. Birmingham is probably in the first or second wave linked to HS2, but as a major city it also has lots of regeneration projects taking place too.
Another potential benefit is that a pension can invest directly into commercial property, when it cannot in occupied residential property. This can open up certain niche possibilities. For example, if you are a business owner, then you could set up your pension to own your business premises, where the rent you pay effectively goes towards funding your retirement...with the tax benefits on the front-end contributions. Equally, you could choose to use a pension fund (especially a SSAS) to invest in buy and hold commercial and use a bit of leverage too as a pension fund can also borrow money.
From a responsibility point of view, there are pluses and minuses. Whilst you are able to pass on the costs of repairs and general maintenance to the tenant, this does need to be closely monitored to make sure the building maintains its condition and value. On the flip side, many commercial tenants are businesses that often come with limited liability, so they can go bust, leaving you with little chance of recovering any rent arrears. It is clear that the legal responsibilities, especially around health and safety are currently more stringent than some residential property requirements, so make sure you are clear about what you need to do...and then do it!
So, I agree that commercial property does offer up some interesting alternatives and not least of which to help diversify the portfolio a little. Just make sure you do your own thorough research before diving in too quickly and the use of a good commercial agent is also probably going to be very handy to provide the right level of support if you do.