As society transitions into post-pandemic norms, demands across the real estate market are changing. While the outbreak of Covid-19 caused a surge in residential property sales, we are now seeing new emerging trends such as the return to adapted office spaces and holiday-makers booking hotels and rental homes as they regain confidence in travel. In turn, this has started to open up new opportunities in the commercial property space.
What is commercial property investment?
Commercial property refers to real estate that is used for business purposes. This typically includes office spaces, retail stores, and shopping centres, industrial factories and warehouses, leisure facilities such as hotels and food outlets, and healthcare centres such as hospitals and nursing homes.
There are several ways to invest in commercial property, including:
Suitable for private investors, direct investments involve buying either a share in a property or its entirety.
· Direct commercial property funds
A more common way of investing in commercial property is via a group investment program whereby investments are made directly into a portfolio of commercial projects. This can involve spaces such as retail stores, offices, or industrial warehouses.
· Indirect commercial property funds
These are also collective investment schemes, but they focus on investing in the shares of a property company instead. Be sure to be vigilant with indirect property funds as they rely on stock market changes, which can either increase or reduce the value of your shares.
The two fundamental ways to earn money from commercial property are through rental income or capital growth from the property’s increased value.
How is commercial property different to buy-to-let?
Buy-to-lets (BTLs) are residential properties such as flats or detached homes, intended for the use of everyday living, whereas commercial property is used for business purposes.
BTLs require many investors to take out a mortgage to get started, and including an average deposit of 20-40%, the combined upfront costs can be very high.
Mortgages can also come with higher interest rates, which can often rise over time. This causes the repayments to increase, so it’s important to be cautious and ensure that your net rental income is higher than your mortgage repayments.
With BTLs, you also need to consider additional costs such as buildings insurance and maintenance and agency fees, all of which will dip into your returns.
Why has interest in BTLs dropped?
In 2020, the gross BTL mortgage lending fell by nearly 12%. In the first quarter of 2021, the rise in demand for residential homes helped bring rental yields up to around 6%, but a decline is expected this year, potentially leaving a long road to recovery.
Moneyfacts data shows that there were 38 fewer mortgage deals available on the market between the short period of January and February 2022, causing the first fall in available products since October 2020. It’s also been found that the average Standard Variable Rate (SVR) on BTL residential mortgages increased from 4.41% to 4.46% between January and February 2022.
As the selection of products reduced and interest rates have started to rise, property investors are exploring alternative options, which could have healthier opportunities to offer considering the current economic climate.
What are some of the challenges in the commercial property market?
While there are many great reasons to consider investing in commercial property, it does come with its challenges. These can include:
· Long periods of vacancy
It’s common for commercial spaces to remain vacant for longer periods of time. This means that, while the space remains unoccupied, maintenance costs are still required to ensure the upkeep of the building.
· Upfront costs
While investing in commercial property can generate attractive returns in the long run, there are significant upfront costs to be aware of. These will depend on factors such as location and property type and size. However, a typical deposit for a commercial mortgage ranges between 25% and 40%, meaning that banks will only lend 60-75% value.
· Economic changes
Commercial property depends heavily on economic shifts and the demand for various types of business services. For example, as the pandemic hit, the need for many commercial spaces started to fluctuate heavily. This includes restaurants and retail stores, which initially diminished, but new trends are showing a comeback for these sectors.
Why you should consider commercial property investment
The UK commercial investment volume reached £57bn in 2021. That’s a 21% increase year-on-year and above the 5-year average. This year, research experts at Savills expect to see a further 10% rise. Some of the pros of commercial property investment which can contribute to these positive trends are:
· Possibility for longer leases
While vacancy periods of commercial spaces can be longer than BTLs, the lease terms are typically longer, too. Renting out an office space to large companies, for example, could lead to a long-term lease and, therefore, a regular income source is secured for longer.
· High-income potential
Despite some of the substantial upfront costs, commercial property can have lower outgoings further down the line. For example, tenants are often responsible for covering the cost of any interior changes to business spaces, which contributes to a higher income potential compared to BTLs as this means there are fewer additional costs eating into your returns. Also, it’s been found that commercial investments can produce an average yield of 10.7%, that’s 3 times higher than that of residential property, which offers just 3.7%.
· Diversification opportunities
One way to diversify could be to invest in commercial property if residential property is already a part of your portfolio. The key benefit of diversification is to spread volatility and avoid leaving a single investment susceptible to risk. Consider seeking expert advice to evaluate affordability and find the best property that works for you and your investment goals.
Propiteer Capital’s commercial property development
This year and beyond are looking more than promising for the hotel and commercial leisure industry, with a moderate but strong rebound on the cards. By the end of 2022, industry experts predict that regions outside of the capital city will see a 25.4% increase in occupancy levels versus 2021. The average daily rate is also expected to rise by 8.9% year on year, and revenue per room (RevPAR) is likely to increase by 32.5% compared to last year.
At Propiteer Capital, we provide a number of investment vehicles to offer ways of getting involved in this thriving market.This year, we are excited to be offering several new commercial leisure property investment opportunities through our successful partnership with world-class hotel brands Hilton and Marriott International. One of these includes the prestigious Hilton Garden Inn in Peterborough’s city centre.
Overlooking the river and a stone’s throw away from Peterborough cathedral, the renowned hotel will feature a glass lift, which will lead to the iconic Sky Bar on the top floor. With a gross development value of £26m, this city centre hotel aspires to be the finest Hilton Garden Inn in Europe to date.
In Northern Ireland, the UK’s best performing region for post-pandemic economical bounce-back, we are working with Marriot to bring a 164-bed Moxy by Marriott hotel later this year to Belfast Cathedral District, situated on the old Nambarrie Tea factory site. The Moxy caters to the “hippest urban destinations” and is the perfect addition to a booming, modern Belfast. Here at Propiteer Capital, we’re excited to be able to offer commercial investment opportunities in such contemporary, prime locations.
Depending on your investment goals, there are a few different ways for sophisticated and high-net-worth investors to get involved in commercial property, whether it’s a direct purchase or via a collective investment scheme. While this investment type does come with its challenges, it also has the potential to offer attractive returns and poses some great diversification opportunities. This could be in the form of varied locations, business purposes or target demographic, many of which are covered by Propiteer Capital projects.
How to get involved in commercial property investing
In line with the market’s returning success, at Propiteer Capital, we offer a branded hotels investment model with a minimum term of 24 months and an annual profit of 6.0% for sophisticated and high net-worth investors to get involved in commercial leisure property. If you’re interested in getting started or to learn more, visit our website for information on our listed bonds and details on our Branded Hotels investment type.