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Beginners' guide to investing in commercial property - Eddisons

Written by: John Padgett on Thursday 22/10/2015

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A distinctively different asset class from residential property, commercial real estate has plenty to offer in the way of gains to savvy investors.

The UK’s commercial market is set to enjoy huge gains as investor confidence has returned to the market following the 2007 recession, with deal volumes at the close of Q3 2015 totalling over £50 billion. It isn’t too late to move into this market, and with the specialist knowledge and assistance of commercial property experts, investors can find incredible deals in established markets such as London and elsewhere throughout the UK.

Understanding the basics

Commercial property is, by definition, real estate that is used for business purposes.

This can therefore include a range of properties, from warehouses to offices, car parks, retail space, and even vacant land. You can invest indirectly through a fund such as a REIT, or directly by investing in a fund that holds physical property in it’s portfolio. Alternatively, you can invest directly by simply acquiring the physical asset yourself. A collective investment scheme is perhaps the easiest way for first-time investors to break into this market.

When a conventional bricks-and-mortar fund invests directly, they will buy the property and assume responsibility for the maintenance and rent collection. While there are certainly benefits to this method, there are some difficulties, the obvious drawback being that large buildings like offices and warehouses are not easily or often bought or sold. Another factor to consider is the cost of buying such a property outright, along with the time and effort associated with running the property, leasing it, and collecting rent.

Therefore, many buyers examine the prospect of a property securities fund, which invests in the shares of listed property companies. Investors also have the option of directly purchasing shares in a REIT, a real estate investment trust, which will normally have a portfolio of numerous properties.

Prime, secondary and tertiary commercial property

Commercial properties are broken down by asset class based on their value, and are categorized as being primary, secondary or tertiary property.

Prime property is the most valuable, high-quality property, normally located in central areas of large towns and cities, and therefore more likely to draw in a high quality of tenant. Secondary and tertiary property can be found in less prime locations, but still have lots to offer investors. However, a smaller pool of tenants means there is a higher risk of prolonged vacancy rates, or periods when the property lies empty.

Whether investing in any property in any category, it’s important to bear a few things in mind when entering the market. One thing to think about are vacancy rates; not only can an empty property put a dent in your cash-flow, but it can attract thieves and miscreants that can cause huge amounts of costly damage. Finding high-quality tenants to avoid defaults on rent is important, and so you should always ensure a guarantor is in place when leasing a property.

Volatility, diversification and liquidity are three aspects of investment that those interested in commercial real estate should be keenly aware. Working alongside a specialist firm with experience in this sector can help you make an informed decision and protect your investment.

Written by: John Padgett on Thursday 22/10/2015

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