Almas Uddin
Founder and Mortgage Advisor
26 Oct 2022
Although much of the economy is fluctuating and struggling in an inflationary environment, our latest research shows that average rental yields for commercial premises are 6% across England and 8.6% in higher-demand areas.
The pandemic doubtless had a considerable impact on the commercial property sector, with empty offices and a switch to at least partial home working.
Retail units were also affected, with vendors finding it difficult to compete with an increasingly digital industry. Industrial traders faced challenges around rising energy costs, material scarcity and complex changes to import and export post-Brexit.
Despite all of this, commercial rental yields remain stable and higher than average rental returns - so does commercial property represent a golden investment opportunity?
Average Commercial Property Rental Yields
Average commercial property investment prices and yields vary between regions:
- In England, the average commercial unit costs £968,177 with a monthly rental income of £4,806, representing a yield of 6%.
- South East properties reach the highest yields with averages of 8.6%.
- Yields are averaging 8.1% in the North East, 7.4% in East England, 5.7% in the West Midlands, and 4.8% in the East Midlands.
The South West has the largest volume, accounting for 16% of all commercial property stock available for sale, followed by the North West with 14.9%, the East with 12.8%, the South East with 12.5% and the East Midlands with 11.9%.
The Advantages of Commercial Property Investment
Managing a business premise or unit is a somewhat different undertaking from investing in residential property and renting it out to private tenants.
Non-professionals tend to assume that the best property investments are found in the residential market. Still, commercial property can be lucrative and accessible with professional support to secure favourable financing and management services.
When purchased, residential properties are almost always vacant, requiring an upfront expense to refurbish the accommodation and then begin marketing to find a suitable tenant.
Commercial property is often sold with a tenant in situ, remaining in place when the ownership transfers to the new investor. The advantage is that there is no void period to contend with, and commercial landlords often circumvent the admin and costs of a refurbishment.
Some new commercial landlords may wish to prioritise vacant properties within their search or prefer to be able to select their own business tenants.
Rental agreements for residential property typically require rent to be paid a month in advance. In contrast, a commercial tenant commonly pays up to three months in advance, providing an immediate and reliable income stream.
Commercial leases are often much longer than the conventional 12-month average, and tenants may commit to a lease for several years.
The landlord is usually not responsible for ongoing property maintenance or repairs, with commercial tenants bearing the costs of keeping the rented premise in good condition.
These compelling factors mean that commercial property investment may be attractive in terms of lower ongoing costs, long-term reliability and lower void periods.
Downsides to Investing in a Commercial Rental Property
Every investment carries pros and cons, and each investor must have a clear overview of all the important factors before making a financial decision.
Although there tend to be fewer tenant changeovers for a commercial property, finding a new tenant can take longer. When a new business tenant is located, more extended checks and processes are required for due diligence purposes, so it may take more time before they move in.
There is a risk that a commercial tenant could cease trading or fall into insolvency or administration, creating a challenge for the landlord to remove the tenants from the building and recoup any overdue rental payments.
Commercial property commands a higher average rent, so there is the potential for the arrears to be significant.
The final factor to consider is that the legalities of letting a commercial property are more rigorous. It can be more expensive to manage the rental property, construct a formal rental agreement and deal with the logistics of removing an old tenant and moving a new tenant in.
Professional Commercial Property Mortgage Advice
Commercial property investment remains an exciting opportunity, with much emphasis on transforming existing commercial spaces to suit business tenants and customers as they pivot and adapt to a changing trading climate.
If you are interested in commercial property investment, the first step is to crunch the numbers, create a property purchase budget and plan, and make key decisions about financing your new venture.
Please contact Revolution Finance Brokers at your convenience to discuss commercial rental property financing options and costs. Our experienced team can also provide further information about the research statistics supplied within this article.
.webp)
.webp)
.webp)
