This article appeared in The Press on Tuesday 12th September 2006.

Why invest in commercial property? - Pros and Cons of Commercial Property

Jeremy Oliver Property Services Director.

Jeremy Oliver, Director and Head of business advisors Garbutt & Elliott’s property Services Team looks at the pro’s and con’s of commercial property investment.

In recent years we have seen a large increase in the number of investors wishing to invest in “bricks and mortar” as they have become disillusioned with alternative investment returns, e.g. from the Stock Market or from lower interest rates and returns on cash deposits.

The residential property market has been the obvious choice for first time property investors enticed by the substantial increases in house prices in recent years coupled with the relatively low interest rate environment and ability to borrow up to 85% of the purchase price of the property on an interest only mortgage.

Residential landlords are now finding that house prices have risen to such an extent that rental yields barely cover interest costs and so investing in residential has become a very long-term strategy to accumulate wealth with little prospect of positive cashflow in the short term and as a result attention is turning back to commercial property.

Whilst investing in commercial property used to be a game played only by traditional institutions there are now a variety of ways to invest in commercial property such as via an investment syndicate or via a personal pension fund which means small private investors can now generally benefit from the higher guaranteed income on commercial property compared to any income potential from residential rent. This income is usually generated through an institutional lease which places the obligations of repairing and insuring the property on the tenant and there are often clauses with “upward only” rent reviews every few years. As a consequence, commercial properties require minimal hands on management once they have been acquired and any refurbishment costs are less frequent and less costly than for residential rented property.

There are also significant taxation advantages in investing in commercial property compared to residential. It is possible to claim capital allowances on certain items of expenditure which can be deducted from rental income for income tax purposes and provided the tenant is a trading business it might be possible to obtain full business asset taper relief (BATR) after a 2 year period of ownership which means capital gains are taxed at the effective headline rate of 10% rather than 40%. It is sometimes possible to reduce the rate of tax below even 10%.

For businesses wishing to invest in commercial property for their own occupation then investment via a Self Invested Personal Pension Fund can remove obligations for income tax, VAT, capital gains tax and inheritance tax. Notwithstanding the recent changes in April restricting the ability of pension funds to borrow, we have still been able to demonstrate to clients how to purchase properties for circa £1 million with an initial pension fund of circa £150,000. Over a 15-year period assuming modest increases in capital growth this should lead to a fully funded pension fund in excess of £1.8 million from a minimal initial pension contribution.

If you choose to join an investment syndicate your money can go further as there is no limit to the number of commercial properties an individual or syndicate can buy. By joining in a syndicate you spread your risk potentially and your personal investment can go further when combined with that of other syndicate members.

In summary, an investment in commercial property should be a serious consideration for those investors who have already decided that property investment should be part of their wealth accumulation strategies and we have been able to advise many of our clients on the financial and taxation considerations to enable a full risk analysis to be undertaken prior to any commitment.