While there are risks and uncertainties, 2023 could prove to be an excellent opportunity to acquire carefully chosen commercial properties at reasonable prices.
The economic picture
Inflation hovers at 10%, interest rates are rising to meet it. Many publicly traded commercial property REITs are down 30% or more from their highs. Is now really a good time to invest in commercial property? Looked at from another angle, however, we could conclude that there has rarely been a better time to buy commercial property. The markdowns in in prices means that valuations are now much more attractive. It is very difficult to make good investments when markets are at all time highs. The fact that commercial property has been thorough the ringer of late means that there are some incredible bargains to be had. The REITs mentioned earlier now trade at yields of up to 6%. Individual commercial properties can offer considerably more. For the discerning buyer, there is strong value to be had in high-quality commercial real estate. The trade-off for these returns, of course, is the uncertain interest rate outlook we described above. However, we must recognise that since property is a real asset, and a requirement for almost every business, inflation will be naturally factored into returns. By definition, bargain prices are not offered when the economic picture is free of rainclouds.
Stress test your assumptions
Your mortgage lender will conduct stress tests before extending the loan, incorporating increases in interest rates and ensuring expected rents will cover mortgage payments with a margin of safety. However, you should take responsibility for conducting a stress test of your own finances before making the mortgage application. Have you made allowance for wear and tear, and a refurbishment if required? Do you have a sufficient cash reserve to tide you over during void periods between tenants?
Why buy commercial property?
Commercial property offers several compelling benefits over residential. These advantages are more apparent since government took action to limit the attractiveness of residential buy-to-let investments in recent years. For example, commercial property is often less work from a management perspective, repair obligations often lie with tenants, and landlords are free of a great deal of the tenant protection regulation that has proliferated in the residential sector. The right commercial properties can often be let on longer-term multiyear leases, and since they are used for business purposes, owners of commercial properties are able to take advantage of capital allowances and depreciation schedules to offset their expenses against tax.
Work with an expert
A reputable commercial mortgage broker will be able to advise on how to make an application likely to be attractive to lenders, minimising your mortgage cost. A broker will also be able to act as an independent source of advice and point you towards reputable commercial property experts who can suggest sectors of the market, and even individual assets likely to provide attractive returns, depending on your risk tolerance.
You can find the UK’s best-rated brokers in our Commercial Mortgage Broker Directory