Investing in UK commercial property? Here’s what you need to know

Investing in UK commercial property? Here’s what you need to know

updated February 12, 2020
London Properties

Put simply, investing in UK real estate is usually focussed on two primary sectors, namely commercial (offices, retail, coworking and leisure properties, i.e. hotels) and residential (houses, apartments or serviced apartments).

Investment may be into existing properties or in land for future development.

In addition, there are opportunities to invest in the warehouse, logistics and industrial sectors but these tend to attract more specialised types of investors.

Commercial Real Estate in London

In the UK commercial real estate differs from residential in both the nature of the property (size, layouts, building systems, location etc.) and the mode of occupancy. Occupants of commercial real estate such as grade A offices in London will, typically, secure long leases as they expect to remain in the properties for 5, 10 or even 20 years. The basis of such leases means that the tenants or lessees will be responsible for all repairs, maintenance and insurance of the properties in question—often called an “FRI” (“Full Repairing Insuring”) lease. This means that the rent received by the building owners is already net of maintenance and operating expenses.

Yields or returns from commercial real estate such as grade A offices or prime retail space tend to be seen as more secure and are generally lower than those for most residential properties. One reason is because the security of income is guaranteed, especially if the lessee is a “blue-chip” occupier with a strong covenant. Commercial occupiers using large spatial areas don’t usually suddenly move from property to property, whereas residential tenants may move every few years, creating voids and the need to find a new tenant.

In London, yields from grade A offices are, typically, in the range of 4% to 4.75% and may vary by district as well as by property.

Types of investors in London Commercial Real Estate

With a property market as well known and as popular as the London commercial market, there are a myriad of parties actively looking to invest.

These may include but are not limited to:

  • privately held companies or public entities such as governments, insurance companies or foreign sovereign wealth funds;
  • developers looking to build and sell such newly built property for profit;
  • property investment companies holding property as long-term investments for the income streams;
  • end users who are building to meet their long-term spatial requirements;
  • high net worth individuals (“HNWI”)

What are the primary options for investment into commercial real estate in London?

For anyone wishing to invest in commercial property in London, there are two primary options.

Option One: Direct investment into the commercial real estate sector       

There are many steps needed to achieve success in this regard, some of which are as follows:

  • Identify a suitable niche in the commercial sector to invest in (i.e. offices or retail units, coworking spaces or maybe shopping centres and so on);
  • Undertake the necessary research on the selected market sector(s) and formulate a business plan with a feasibility study. Once you have decided which particular sector of the property is of most interest, it is necessary to start looking in more detail at matters such as:
    • investment returns (net yields);
    • Return on Equity (RoE);
    • Return on Project (RoP);
    • Internal Rates of Return (IRR’s);
    • ease of entry into the chosen market sector (i.e. are there sites or buildings for sale which meet your requirements?);
    • planning and development issues;
    • ongoing management of the completed assets.
  • The next step is a big one: Obtaining funding for the proposed development. You will probably need to have enough deposit, either your own capital or obtained by syndicating the initial investment amongst friends or business associates, to convince the primary lender to lend to you. But you will also need a good track record showing your ability to invest in the London commercial property market.

Option Two: Indirect investment

In essence, a series of investors pool together their funds in a structured way in order to collaborate, cooperate and jointly invest in commercial real estate in London. There are many advantages to this option, not least of which is the fact that most of the hassles associated with real estate development in London are eliminated.

Furthermore, you are making an investment with experienced developers or professional property/asset managers who are well-versed in maximising investment returns.

Commercial property bonds and REIT’s

How to indirectly invest in commercial real estate in London?

1.     Investing in Commercial Property Bonds

These are bonds issued by property developers to raise funds for commercial property developments, usually in major cities such as London.

Commercial property investment bonds are one of the best options for anyone looking to invest in the London property market. Or, for someone making their initial foray into financial investment and planning to build an investment portfolio.

Investing in commercial real estate bonds takes away the various hassles related to development or direct property ownership. In addition, investors can avoid paying maintenance fees, stamp duty, council tax, insurance payments, as well as avoiding getting involved in complicated tenancy issues.

2.     Buying investment units in a REIT (“Real Estate Investment Trust”)

REIT is a structured investment into commercial real estate. Often, a developer will build an office block or retail centre, for example. Once the properties are producing a stable income stream, the developer may establish an REIT and sell off a percentage or all of the property ownership to the REIT, but usually keeping majority ownership control (via the highest percentage of shares).

The developer or one of its subsidiaries will probably become the asset manager and continue to maximise the returns from the property(ies) for all owners, including those who acquired shares in the REIT. Profits are distributed to the REIT shareholders as dividends sometimes as often as 3 or 4 times per year.

The income streams from most REIT properties show above-average investment returns, but the value of the shares may go up and down according to market conditions. Often, a bank or other financial institution will “package” a collection of REITS into one “umbrella fund” to enable investors to have a selection of funds to choose from and not be confined to investing into one REIT.

Why commercial property bonds are a highly favoured investment option

Generally, commercial property bonds issued by an experienced developer are return-focussed, paying interest rates that have been agreed in advance. The value of the loan is not subject to change as with the shares in a REIT. Therefore, investing in a commercial property bond is considered more secure.

Other key attractions of commercial property bonds include the facts that:

  • Such bonds can be asset-backed;
  • The annual returns are some of the most attractive around.

Nao Group has a long track record of successful commercial real estate investment development projects in London. Over the years, we have issued many commercial property investment opportunities to a broad range of investors.

If you are interested in learning more about Nao’s property investment bonds, or wanting to invest in great asset-backed investments in London, don’t hesitate to contact us today. Alternatively, you can click here to find out more about us and this exciting opportunity.

Nao Group is a commercial property developer creating coworking spaces in London and across the globe: building communities, not just places to live and work!

 

 

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