Commercial properties are usually divided into three main categories, in order of size and value:
- Retail property – warehouses, high street shops, shopping centres, supermarkets and department stores.
- Office property – office buildings and business parks.
- Industrial property – the smallest category by value, covering industrial estates and distribution warehouses.
There are some exceptions to these categories, which include properties in the leisure sector such as hotels, pubs and cinemas.
To invest successfully in commercial property requires as much skill and expertise as investment in the stockmarket. In addition to an understanding of the risks involved, both require an assessment of the current and future condition of the economy, as well as its potential impact on the company or property being considered for investment. For example, a sharp rise in short-term interest rates will undoubtedly affect consumer spending, therefore reducing the investment appeal of shops and other retail property.
Investors should also take other factors in to consideration, such as location, the lease terms and making sure the property is suitable for the use to which it is put. Additionally, investment in property is not just a matter of making purchases then sitting back and collecting rents until the lease expires. To maximize returns, investors need to take an active approach to property management. For example, refurbishment, change of planning use and a renegotiation of lease terms can all add to the overall return from a property.
Why invest in commercial property?
One of the most widely accepted principles of investment is that diversification reduces your risk. There are a variety of reasons why private investors should consider commercial property as part of their overall investment portfolio.
Regular reviews mean that property rent can keep pace with inflation. This process takes account of rents on similar properties. Additionally, where existing leases are being extended, upward only rent review provisions stop rents falling to market levels on the extended lease. General market conditions will also have an impact. In the early '90s for example, rents for new tenants fell significantly below those paid by existing tenants.