Commercial property can be a lucrative investment, providing potential for significant returns and ongoing passive income. Whether you are a seasoned entrepreneur, a business owner looking for space or a newcomer to the commercial property market, navigating the complexities of buying, selling, and renting commercial property requires a strategic approach.
This comprehensive guide will walk you through the key steps and considerations involved in the commercial real estate market.
Understanding Commercial Property
Commercial property refers to any buildings that are used for trade, commerce or investment. These properties serve as locations for businesses to operate, generate revenue or lease to other businesses.
Typically, these will be categorised as:
- Retail spaces – shopping centres, shops, supermarkets and retail warehouses
- Offices – any building used for commercial, professional or bureaucratic work. These could range from entire properties to single offices
- Industrial sites – warehouses, factories and distribution centres
- Special-purpose buildings – these include hotels, restaurants, pubs, cinemas, gyms, medical centres and educational buildings.
The Commercial Real Estate Market
The commercial property sector in the UK has encountered significant hurdles in recent years, beginning with the UK’s 2016 decision to exit the European Union. Brexit was then followed by protracted negotiations spanning several years, and then the sector reached a climax with the global economic issues caused by the coronavirus pandemic in 2020.
However, despite these challenges, the UK continues to maintain one of the largest commercial real estate markets in Europe. In fact, a report by Property Industry Alliance showed that the commercial property industry contributed approximately £74 billion to the UK economy in 2022.
Freehold vs Leasehold
When investing in commercial property, a factor that needs to be considered is type of ownership; freehold or leasehold. The choice significantly affects your autonomy over your property and potential long-term financial obligations.
What is a Freehold Property?
When you own a property freehold, you own both the building and the land it stands on indefinitely. This means there are no time limits on your period of ownership and you have more freedom regarding your property, with fewer restrictions on what you can do with it.
Although the building is yours, similar to residential properties, you may still need to comply with local planning laws or community regulations if you wish to make changes to the building.
What is a Leasehold Property?
Owning a property leasehold means you only have the right to occupy and use the land and building for a limited period. The duration of this period is set out in a lease agreement and can vary anywhere from a few years to hundreds of years.
The land itself remains the property of the freeholder (landlord). Leaseholders face more restrictions, which can include obtaining permission from the freeholder to carry out alterations or subletting.
Liaising with Solicitors
It is important to seek the guidance of commercial conveyancing solicitors to support you in navigating the buying, selling or leasing of commercial properties.
Choosing an experienced firm like Terrells LLP will help you feel more at ease and ensure that the process runs as smoothly as possible. We would carry out specific duties for you, including:
- Pre-contract negotiations and searches
- Commercial property standard enquiries
- Preparing purchase and sale contracts
- Dealing with leases
- Exchanging contracts
- Transferring deeds
- Handling mortgage deeds
- Arranging payment of stamp duty land tax
- Answering any legal questions
Buying Commercial Property
Assess Your Goals and Resources
Begin by understanding your investment goals. Are you looking for short-term gains or long-term income? Assess your financial capacity, including available capital for deposits, your borrowing capacity and risk tolerance.
Research the Market
Market research is crucial. Understand local economic conditions, tenant demand and property values. This involves analysing demographics, employment rates and future development plans in the area.
Type of Building
Think about the type of commercial building you are after – retail, offices, industrial or leisure. You may need to consider the facilities that the building already has, how the space is configured and the impression it might give to potential clients, employees or tenants.
Location Analysis
The saying “location, location, location” holds particularly true in commercial property. The right location can mean the difference between high vacancy rates and a fully leased building. Consider the following:
- Visibility
- Accessibility – air, sea, rail and road links
- Local competition
- Parking facilities
- Delivery restrictions
- Local amenities
- Proximity to a pool of potential employees
Financial Analysis
Develop a good understanding of the property’s financial performance. Look at the current financial records, like income statements, leases, tenant agreements and operating costs. Understand the net operating income (NOI), cap rate, and internal rate of return (IRR) to evaluate the investment’s potential.
Due Diligence
Perform a thorough due diligence process. This includes inspecting the building thoroughly for structural integrity, code compliance and environmental issues, reviewing zoning designations and verifying title information.
Consider hiring professionals like surveyors and commercial conveyancing solicitors for a comprehensive assessment. Our specialist conveyancing solicitors at Terrells LLP are always on hand to advise you on the due diligence process.
Financing the Purchase
Commercial property financing is typically more complex than residential financing. Make sure to establish a budget that takes into consideration all possible expenses:
- Purchase price
- Stamp duty land tax
- Advice from professionals – costs for solicitors, estate agents, lenders, financial/tax advisors, surveyors
- Renovations
- Other expenses – furniture, equipment, setting up facilities
- Ongoing expenses – insurance, maintenance, local authority charges, mortgage repayments
Be sure to explore all of your financing options, this may include traditional bank loans, commercial mortgages, and even cash payments.
Negotiating the Deal
Make an informed offer based on your research and due diligence findings. You will want to negotiate terms and conditions regarding price, financing, contingencies and timelines.
Exchange and Complete
Finalise financing arrangements and secure all necessary approvals. Our commercial conveyancing solicitors will coordinate with other legal professionals to help you review and sign contracts, before exchanging and completing the process.
Selling Commercial Property
Timing the Market
Timing can significantly affect the profitability of selling commercial property. Monitor market conditions and plan your sale when demand is high and financing rates are favourable to attract more buyers – which is easier said than done, of course.
Be Prepared
It is worth creating a pre-made pack full of all relevant documents for potential buyers. It may prompt them to make a quicker decision and help with communication or frequently asked questions. This package could include:
- Lease agreements
- Financial statements
- Planning permissions and building regulations
- Asbestos survey
- Gas and electrical certificates
Valuation
Accurate valuation is absolutely key. It can be beneficial to hire a professional valuer or consult with estate agents for expert insights.
Valuations are based on the property’s income potential, the condition of the property and comparable sales in the area.
Marketing Your Property
Effective marketing is essential to attract potential buyers. This might include online listings, professional photography, virtual tours, and highlighting any unique features and investment potential. Networking with other commercial real estate professionals can also uncover potential buyers too.
Negotiating Offers
Be prepared for negotiations. It is important to understand the legal aspects of commercial sales, which can be more complex than residential deals, including lease agreements, tenant rights, and property management details.
Get in touch with us if you have any legal questions relating to this.
Evaluate all offers carefully before making a decision, considering price and terms, and if counter offering, do so strategically to maximise returns while also accommodating the buyer’s needs.
Completing the Deal
The completion process in commercial transactions involves several legal and financial steps. Our team at Terrells will review all documents, including deeds, title, and completion statements to ensure everything is in order before exchanging and completing the sale.
Renting Commercial Property
Understand the Rental Market
Research rental rates, vacancy rates and demand for commercial space in your target area. Identify the type of tenants you would like to attract based on property type and location.
Finding Tenants
Finding the right tenants is crucial as they directly impact your property’s profitability. Marketing strategies similar to selling can be applied here, focusing on platforms that target businesses looking for commercial spaces.
Conduct background checks and verify references to mitigate risks involved with leasing.
Lease Agreements
Lease agreements in commercial rentals are complex. Terms can vary significantly depending on the type of property and the business needs of the tenant. At Terrells, we are experienced in drafting lease agreements and can support you through this process.
Managing the Property
Effective property management is key to retaining good tenants and maintaining the property’s value.
Establish clear communication channels from the start and respond promptly to tenant inquiries or concerns. In some cases, this might involve hiring a property management company to handle day-to-day operations and tenant relationships.
Renewal and Lease Termination
Evaluate lease performance and consider lease renewal options based on tenant satisfaction and market conditions. You must provide sufficient notice for lease termination and follow all legal procedures for evictions if necessary.
Conclusion
Investing in commercial real estate can offer impressive returns, but it comes with its own set of challenges and risks.
Whether buying, selling or renting, success requires careful planning, thorough research and a good understanding of the market dynamics. By following these guidelines, you can increase your chances of making a profitable and sustainable investment in the commercial property market.
We have also put together a guide to the latest budget to give you the most up to date information.
Our team of experienced commercial conveyancing solicitors at Terrells LLP are always on hand to assist you through the buying, selling and renting process. Please get in touch with us today to see how we can help you.
