Commercial Property Misconceptions: Investing in Commercial Property is too risky

Over the next couple of months we’re going to give our perspective on a few common misconceptions we often hear around Commercial Property. We’ll start by examining whether an investment in this particular type of asset class is inherently risky.

Let’s immediately be clear upfront, no investments are free of risk. We all know to avoid anyone who claims otherwise.

But, what are the risks with commercial property? Well, you might buy a real turkey; you might have a dodgy tenant; the market might collapse. Bear in mind, though, that those risks exist no matter how you buy the property. However, some ownership models will nullify those risks, even if they are actually quite small risks anyway.

If you identify the property, it’s probably because you know it’s not a turkey, and if you know you have a solid tenant (quite often the tenant is your company), you can rely on the rental yield too. You can now all but ignore the first two risks. As for the market collapsing? Well, yes that could happen, but even if it did, it’ll also recover if you give it time.

Let’s say you are renting your commercial space. Let’s say you aren’t, you own it through your company and you borrowed to buy it. In both of these cases you are placing unnecessary burdens on your cash flow.

Any borrowing repayments are coming out of taxed income and the property sits on the company books. This impacts on your corporation tax now and your capital gains tomorrow. Or, at best, rent is going to someone else – someone who has the capital value of the building as well as the rental income.

Surely it’s far better to acquire a property using pension funds and borrowing, and then pay rent to yourself? If you repay the borrowing from untaxed income, you’ll pay it down much faster. You’ll reduce your tax bills today and avoid capital gains should you dispose of the property in the future.

Commercial Property Partner, Amanda Read, responds to our thoughts and explains how Coffin Mew works with us to reduce risk:

“We work closely with TPSG to make sure that the risks of buying a commercial property are kept to a minimum. This includes:

Reviewing the valuation report for the property: We will make sure that the proper market value is paid, and check that there are no important assumptions that the valuer has made that are incorrect.

Carrying out a title review: We’ll carefully review the title to make sure that there are no unexpected issues that might reduce the ability to use the property, or it’s value. We’ll check that it can be accessed and can be used. We’ll also check whether an owner might be liable to pay anything going forwards.

Conducting searches: The Commercial Property team at Coffin Mew will conduct full searches to ensure that nothing unknown affects the property that might affect its value, or use. This includes things like not having planning consent, whether there are any enforcement notices that need to be complied with, if it has any connections to proper services and whether there is any liability for environmental clean up costs.

Introducing commercial leases: We will put in place a good commercial lease that passes responsibility to the tenant for complying with statutory requirements at the property, keeping it in repair and protecting its long term value. If you have paid the right price, and made sure there are no unexpected costs that might arise, the risk is limited and calculated. Good quality property that has been properly considered should be a relatively low risk asset for your fund.”

For more understanding on the legal considerations when choosing to invest in commercial property, Visit Coffin Mew’s Website.

Commercial property investment isn’t going to be the be all and end all for everyone. But to understand what the risk of not investing in this asset class is to you, give us call on 01249 280020; we’ll be happy to provide some context.

Any opinions provided in this article should not be considered or treated as advice. Always ensure you seek financial advice from an FCA approved financial adviser before making any investment decisions.

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