Going commercial pays off

Avoid the lulls of residential property and invest in something more stable

The new hot property is shops, offices, factories and business parks - and that's official. Almost three-quarters of the UK's 750,000 buy-to-letters have taken the plunge and invested in commercial property and 90 per cent of the rest plan to do so, says a Mortgages for Business survey.

The new hot property is shops, offices, factories and business parks - and that's official. Almost three-quarters of the UK's 750,000 buy-to-letters have taken the plunge and invested in commercial property and 90 per cent of the rest plan to do so, says a Mortgages for Business survey.

More than half of commercial investors aim to expand their portfolios by three to five units in the next 12 months, with small offices and office blocks their favourite targets, closely followed by light industrial units, says the MfB report. The only major hurdle seems to be knowledge - a report by the Property Investors Forum (PIF) says although more non-investors want to go commercial, few actually know how to do it.

For those who do, it's the longevity factor that appeals. "The residential market has seen a tightening of rental yields over the past 18 months and buyers are looking for the long-term capital appreciation and higher yields of commercial premises," says David Whittaker, MfB's managing director.

Investing in a local shop or small business park is often seen as risky and remote. Stephen Harper, managing director of Millfield Foundation, which specialises in advising on using pensions for property investment, explains: "Until recently, most brokers would laugh their heads off if you said you wanted to invest in a commercial rather than a residential property."

But the lenders have relented. Instead of turning down all but the most enticing of deals, some will offer a secure mortgage of 80 to 85 per cent loan-to-value - similar to residential investment loans - on a sound proposal with a business plan. Lenders with a sympathetic ear for commercial investors include HBoS, HSBC and Anglo-Irish banks, the Royal Bank of Scotland, Bristol & West building society and Portman building society's Mortgage Works.

Stability is another factor. "Investing in commercial units is much more predictable than letting out houses and flats which are driven by affordability and supply and demand, so are far more volatile. A shop with a 25-year lease and a blue-chip tenant is an alluring prospect as it's unaffected by market fluctuations," says Harper.

"Though investment by individuals has been lagging behind the USA, Australia and many European countries, putting cash into commercial property is timely now as the buy-to-let market is declining, while the availability, marketability, yields and capital growth of shops, offices and industrial units is rising. Every investor should include at least one or two of them in their portfolio to spread their assets and reduce risk."

Time is certainly of the essence. Government plans to introduce pifs (property investor funds) - multi-use portfolios that give 8 to 9 per cent returns for small downpayments - would be a real fillip for investors who often struggle to raise the £25,000 to £50,000 deposits needed for most commercial deals. "If pifs go ahead next year, the UK's small investors have approximately £35bn of capital to put into commercial property which, in the last three years, has consistently out-performed equities and bonds," says Charles Follows, research director of the PIF, which has just sent a consultation paper on pifs to the Government.

Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors, says: "The number of UK investors in commercial property is now 10 per cent, compared with 2 per cent four years ago. Though it is harder to buy commercial than residential and the price tags are usually higher, it is becoming the preferred option as the buy-to-let market has levelled off this year and is unlikely to make a comeback."

Market saturation and dwindling rental yields have also made it a no-go area for the disillusioned landlord. "Many who invested during the golden period overlooked the work, expense and after-sales service needed for renting out the average house or flat. Some have sold off their assets and given up on the idea altogether," says Khatri.

So while the glitter fades, investors have turned to the relatively hassle-free commercial sector, both at home and abroad. "Instead of investing in a Spanish villa or Paris apartment, they have bought B&B accommodation, wine bars and sports and recreation centres," says Khatri.

The figures say it all really. The latest Investment Property Databank (IPD) figures show returns of 16.1 per cent on UK commercial property - compared to 10.7 pc for equities and 0.9 pc for gilts in the last 12 months (9.3 pc, 2.1 pc and 0.8 pc respectively in the past six months).

Mortgages for Business: 01732 471600; Millfield Foundation 01242 234 059. Order a copy of the Commercial Property Investment Guide 2004 (£29.99 inc p&p) from Property Investor News on 020-8906 7772.