Commercial property is an entire field of property rather than technically a strategy, so – health warning – this is only a tiny taster of the main differences between residential and commercial property to give you an idea. It involves acquiring, leasing, and managing non-residential properties like office buildings, retail spaces or industrial units for example (*summary list of relevant UK planning classes at the end of this article) – the general aim being to attain stable, long-term rental income, higher returns and value appreciation. Though in very general terms it requires substantial investment when compared to residential property.

Identify and Acquire. Find a suitable commercial property such as office buildings, retail spaces or industrial units. Perform due diligence to ensure it meets your investment criteria. Local Commercial agents are key here – as they will have access to local knowledge about the various businesses there.

Lease to Tenants. Secure tenants through leases that provide a stable income stream. Ensure leases are favourable and cover a significant period to maximise stability. Leases are crucial in Commercial Property as they will help determine the overall valuation of the property. This is one of the biggest differences between residential and commercial property.

Manage Property. Typically, Commercial Property will be on what’s called an FRI lease (Full Repairing and Insuring). This means that the required input from the owner/Landlord is minimal after the initial lease is setup. For example, if you bought a vacant shop space relatively cheaply, you could then simply make the space “habitable” (functional), then rent the space out to a Charity for example who would setup the space exactly how they needed. At the end of a lease, it is fairly common for a tenant to have to return the space back to the original condition. The track record, size, creditworthiness etc of the business that rents the space reflects their quality as a tenant and the covenant strength. This has a direct effect on the valuation – better tenants, better valuation.

Pros:

• Steady Income. Generally there are no voids with Commercial Property and leases typically could be 5, 10, 20 or even 30 years or more, with rent reviews at certain intervals depending on the lease.
• Business to Business. Dealing with another business as your customer/tenant can make things run more smoothly – as you are “talking the same language”.
• Less Competition. Compared with residential property, commercial property can be a bit more like investing in a “wide open ocean” – rather than fighting in the “paddling pool” of residential property.

Cons:

• Higher Initial Investment. Acquiring commercial property generally requires a substantial upfront investment compared to residential properties. Typically 40% deposits or more.
• Interest Rates. Investment/deal/broker dependent, but generally higher.

Investing in commercial property can yield significant returns and stable income, but it also involves higher initial investments in general. It is a huge area, with very many different potential investment types and properties.

*Short Summary of Planning Classes in the UK:

Use Class B2 – General Industrial
Use Class B8 – Storage and Distribution

Use Class C1 – Hotels
Use Class C2 – Residential Institutions
Use Class C2A – Secure residential institutions (e.g. prisons, military bases)
Use Class C3 – Dwellinghouses [sub-divided (a), (b), (c)]
Use Class C4 – HMOs
Use Class C5 – Short Term Holiday Lets (proposed)

Use Class E – Various uses from shops, offices, restaurants, light industrial and much more

Use class F1 – Schools, galleries, museums and more

Use Class F2 – Local community uses

Sui Generis – anything else.