To an untrained eye, investing in commercial property can be a daunting prospect. But with a little insight, there’s plenty of money to be made from it.

Commercial offices, industrial areas and shops took a huge hit during the economic downturn of 2008 – values fell by as much as half in many areas and industries – but the world of commercial is on the rise as confidence continues to grow in the business community. According to the IPD UK Commercial Index, commercial property has generated an overall return of 8.9% over the last year.

What do beginners need to know about commercial property?

Location, location, location

Just as with residential investment, a commercial property’s value is closely linked to its location. While many industrial and retail properties have risen back to, and past, their 2008 valuations, there are many that remain hamstrung by where they’re situated.

So it’s essential to do your homework on any prospective property’s location. Ensure that crime is low, the local economy is thriving and that transport links are healthy and steadily improving, from the perspective of both suppliers and employees. Successful investors utilise their local expertise – if you know of potential infrastructure being planned in your area then it could well be possible to pounce on potentially-lucrative commercial real estate before larger companies and pension funds start sniffing around.

How residential and commercial investment differ

Investing into commercial bricks and mortar differs from residential property in a number of ways:

• Greater cash flow – you’ll typically enjoy a greater yield per square foot with commercial property than you would residential.

• Higher risk – the higher return comes hand in hand with higher risk. For instance, it will usually take much longer to find a tenant or buyer for a warehouse complex than a city centre flat

• Longer leases – while residential lets can end in 6 months, it’s not uncommon for commercial leases to last between 5 and 10 years.

• More lease stability – as a result, commercial investors enjoy more cash flow stability once tenants are found.

• Tougher lending – less competition for finance means that you’ll have to pay higher interest rates and larger deposits

Understand drivers of demand

Like pretty much every other profit making venture, making money from commercial property is all about understanding supply and demand. There are a few ways to anticipate rising demand:

• Population growth – as new suburbs grow, more services are necessitated and commercial prospects arise.

• Changing demographics – likewise, changing demographics can usher in commercial opportunities. For example, in newly-gentrified areas in London, retail spaces become much more sought-after, as do well-connected warehousing solutions.

• New infrastructure – as I’ve already stated, new infrastructure can foster significant future demand.

• Interest rates – although base rates are currently at an all-time low, a rise could lead to many prospective property owners staying in leased property and boosting rental demand.

• Economic growth – whether national or local, rising economic growth facilitates increased demand. It’s important to understand how commercial property will be affected – typically transport and warehousing space sees the first benefit, then retail spaces grow and finally office jobs start emerging.

Can you afford the cost of entry?

It’s much more expensive to buy commercial property. And so for many, the principle barrier that prevents residential entrepreneurs getting into industrial and retail investment are the initial costs involved – especially when you consider the less attractive mortgage market. But once you’ve got your foot on the commercial ladder, there’s plenty more significant profit margins to be made.

That makes sourcing the right finance essential. If you want to afford the lucrative commercial properties and get good rates, it’s well worth working alongside commercial mortgage brokers to hone your application.

Speak to Pure Commercial Finance about business lending today

Pure Commercial Finance is a team of specialist commercial investment mortgage brokers that pairs investors with the funding they need to step onto the commercial ladder. With exclusive links to leading lenders and the knowhow to get you the best possible deal, we can help you.

Talk to us about what we can do for you today. Call 02920 766 565 or request a call back today.