Property Developers, Property Investors

Is commercial property a good investment?


Simon Misiewicz

20th April 2021

The frequently asked questions about commercial property investment

As property accountants, we are regularly asked about commercial property investment. We will look to answer the below questions in this Article:

“Are you paying too much property tax?”

“Purchase the next buy to let in a company or your own name?”

“What are the basics of commercial property investment?”

“Is the commercial property a good investment?”

“Do commercial properties increase in value?”

“What is a good return on commercial property?”

“Which is a better investment, commercial or residential property?”

“How much do I need to know before buying commercial property?”

“How is commercial property taxed?”

“Are there any tax advantages from purchasing commercial property?”

“Is now a good time to buy commercial property?”

“How does this affect our American readers?”

You may be interested in our Article on Limited companies and tax structures. You may also be interested to know more about how our property tax services help you buy and rent commercial properties in a more tax-efficient way.

Are you paying too much property tax?

Our property tax specialists help over 1,000 monthly retained UK landlords and property investors to minimise tax whilst building their wealth.

There are many reasons why people pay far more property tax than they need. This is because:

– They do not know what they do not know.
– They have not spoken to a tax specialist to go through their situation to see what available tax reliefs are available to them.
– Their accountants or solicitors are not aware of the many reliefs available to their clients and are not taken advantage of.
– Tax legislation changes but either the person or their accountant/tax specialist have not been made aware.

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What are the basics of commercial property investment?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that risk reduction and profit maximisation are of prime concern.

Many of our UK landlords and property investor clients are looking for ways to spread any potential risk.

Diversifying a property investment portfolio can be a good way to do this, with a mix of residential and commercial properties.

Commercial property accounts for 13% of the value of all UK buildings according to industry sources and is worth over £900 billion.

The commercial property sector contains a diverse mix of property types, including office space and retail units.

Commercial property investment includes high street shops to large out-of-town shopping areas. It also includes factories, industrial units, warehouses, restaurants, pubs, hotels, gyms and even car parks.

Commercial property investment can be direct or indirect.

Direct investment involves the purchase of buildings, the ‘bricks and mortar’, while indirect investment can include investment in stocks, bonds and shares of companies that specialise in property investing.

For our clients who are familiar with buy to let property investment, the idea is straightforward.

Residential property is purchased and then let out in return for a rental income to the property landlord.

With commercial property investment, the rental income might be generated each month, quarter, or on any basis agreed between the landlord and tenant.

Most commercial property lease agreements are bespoke, rather than the Assured Shorthold Tenancy (AST) agreements used with residential property investments.

Commercial property leases are usually agreed over much longer terms than UK residential buy to let, with lease lengths for commercial properties in the UK, usually signed for between three and 20 years.

Commercial property investment has been seen as stable in the UK for some time.

Although it involves a large and costly commitment, it is possible to invest through funds such as unit trusts and investment trusts.

These trusts may own shares in property companies or own commercial properties directly.

Commercial property investment can be funded using a commercial mortgage. These are the commercial equivalent of a buy to let loan.

A commercial property investment mortgage will have some key differences to bear in mind.

Mortgages for commercial property investors tend to be offered at higher interest rates, particularly for first-time commercial property owners.

The load to values tend to also be lower, with 65% being common.

Finally, commercial mortgage lenders in the UK can often expect borrowing to be taken on a capital repayment basis. Some lenders accept interest only, but it’s not standard across the country.

Have a question about property investments, tax or being an expat?

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Is commercial property a good investment?

Commercial property offers a good investment opportunity in the UK to earn a regular income, as they deliver higher rental rates compared to residential properties.

There are two main ways to earn money from commercial property investment.

Income from renting to a tenant and capital growth from an increase in the value of the property.

The commercial property investment market in the UK benefits from a longer lease structure than in Europe and the US.

The average lease length in a London office is between 10-15 years, with the average lease length across the UK being approximately eight years.

This is much longer than a residential property, which typically sees a tenant lease of six months to a year.

Commercial property investment potentially offers more security relative to the returns offered by shares, as income is guaranteed for a commercial property investor at a set level over an extended period of time.

As commercial property leases are much longer, these properties usually have an investment value higher than their bricks and mortar valuations.

This means a commercial property investor can acquire a vacant property, and if let on a strong lease to a good tenant, an instant increase in value will be seen.

Most commercial property leases are also fully repairing and insuring.

This means that the tenant is fully liable for repairs and insurance of the commercial property. These leases remove much of the maintenance costs associated with the properties.

Assured Tenancy Shorthold agreements for residential buy to let property investments usually require repairs, maintenance and buildings insurance to be included at the landlords’ expense.

Industry commentators have seen many commercial property investors diversifying their portfolios as a result of the Covid-19 pandemic.

Many have shifted away from traditional city-centre office blocks towards smaller, premium office spaces.

Other types of commercial property have become more popular during 2020, such as student accommodation, pop-up commercial units and specific areas such as logistics and healthcare.

Do commercial properties increase in value?

The value of a commercial property can be increased by simply increasing the rent.

It is worth reviewing the tenant agreements to see if they are paying market rent or if their current rent can be increased.

Some types of commercial property will become a more popular investment choice, as Covid-19 restrictions ease across the UK and consumer confidence returns.

What is a good return on commercial property?

Yields for commercial property investors are typically much higher than for residential properties.

Commercial property investments can yield up to 10%. Residential property usually delivers 1-3%.

The reason for this difference in yield returns can often be attributed to the different lease agreements.

Commercial properties that are capable of delivering the highest return are those with the highest number of tenants.

These properties include apartment complexes, office buildings, student housing and storage facilities.

Which is a better investment, commercial or residential property?

Residential properties can be purchased for far less money, with commercial properties requiring much more money upfront and with stricter lending requirements to obtain financing.

Buy to let investment has become less attractive in the UK in recent years.

Property prices have been increasing, while the average UK rental yield is now just 3.53%.

Tax rules have also become less favourable for residential property investors who own the property in their own name rather than through a limited company.

The 3% stamp duty surcharge introduced in 2016 has further squeezed potential buy to let returns.

Commercial property investment may have higher initial costs, such as building purchase price and refurbishment costs, but the overall returns will be much higher than a residential buy to let property.

Commercial property investors usually deal with companies rather than individual tenants, which means that many common issues associated with renting out residential properties do not apply.

Commercial leases are contractual, giving them more protection under the law in comparison to residential tenancy agreements.

In most cases, the stamp duty is higher on residential properties than on commercial properties.

A buy to let landlord will also pay an additional 3% levy on top of the normal charge.

Commercial property tenants are responsible for property maintenance and repair, saving time and money for commercial property investors.

This makes commercial property investment a good option to deliver a stable investment with minimal input.

How much do I need to know before buying commercial property?

Before buying commercial property, it is worth considering the following key factors:

– Decide why you want to invest in commercial property
– Establish financing options early on
– Talk through the process and get professional advice
– Research location and review the UK hot spots
– Do relevant industry analysis
– Book in time to speak to a property tax expert

How is commercial property taxed?

Profit on commercial property is taxed at the same rate as income tax or corporation tax.

This is dependent on how you structure your property investments.

Some commercial property landlords invest in their own name and will be taxed at 0%, 20% (basic taxpayers), 40% (high rate taxpayers) and 45% (additional rate taxpayers), depending on their income levels.

If a commercial property investor holds a property inside a limited company, the corporation tax is currently 17%.

The impact of Stamp Duty Land Tax (SDLT) needs to be factored in when considering taxation of profits made from commercial property investment.

There are legitimate ways to avoid Capital Gains Tax on UK property but speak to a property tax expert.

The HMRC has laid out clear guidelines on different stamp duty rates in place for non-residential and mixed-use.

There are also some deductions and relief available from the HMRC for commercial property investors.

Are there any tax advantages from purchasing commercial property?

One of the main tax advantages of investing in commercial property is that an investor may qualify for special capital tax gains treatment when selling up. Effectively, you can never pay more than 10%.

As a general rule, the sale or lease of a commercial property is also exempt from VAT, which means that neither the purchaser nor a tenant has to pay VAT.

Everything you need to know about commercial property tax benefits for investors needs to be reviewed.

Is now a good time to buy commercial property?

During the first Covid-19 lockdown in the UK, many retail businesses were forced to close. This represented a likely fall in rental income for many commercial property investors at the time.

At the same time, essential retailers such as convenience stores saw sharp increases in sales. This made them a popular choice for commercial property investors in the UK, as they were seen as ‘pandemic proof’.

Industry sources have estimated that retail pop-up now represents a £1 billion industry in the UK, while there has been a rise in demand during 2020 for logistics and warehousing commercial units nationwide.

The boom in demand for warehousing space from the rise and rise of E-commerce has led to estimates of demand increasing to 92 million square feet of commercial warehousing space being required by 2024.

Some high street retailers such as John Lewis have responded in resilient ways to Covid-19 and the negative impact on footfall in UK shopping centres.

They are currently looking to turn surplus stores into affordable housing and renting unused storage facilities into gyms and housing projects. This mixed-use change bodes well for commercial property.

Industrial properties are experiencing higher demand.

Properties that had before Covid-19 been mainly for industrial use with low rents have become important in the development of the online retail sector since 2020.

They offer well-located warehouse space to store, arrange and dispatch products across the country.

Commercial property investment remains a good opportunity, and now is a good time depending on the type of commercial property being invested in.

Retail units are slowing down, good quality warehousing is hugely popular, and offices will require prudent selection during 2021 to ensure a reasonable return for UK commercial property investors.

How does this affect our American readers?

Owning a commercial property that generates an income could be taxable by the IRS in the United States if you are an American.

If you live in the United States, the income generated from the commercial property investment will also be taxable by the IRS, depending on the VISA you hold.

To learn more, make sure you head over to our sister company Purser Tax that helps British people save Tax in the US and Americans save Tax in the UK.

It is one thing to be tax-efficient in the UK or the US; it is another thing to be tax-efficient across the Atlantic.

This is why you need to get a tax advisor that truly understands international tax.

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