This guide covers…
This guide deals with the special things that you will need to take into account when choosing commercial property. By commercial property, we mean things such as offices, shops, bars, restaurants and warehouses.
It is best read in conjunction with our country specific guides to Choosing Commercial Property but we have produced this global version to deal with the countries for which we have no published guides.
Increasing numbers of foreigners are looking for commercial property in countries all over the world. This is usually as part of their plan to do business in that country but it is sometimes as a straightforward property investment.
Choosing commercial property for your own use
Choosing commercial property is a lot more complicated than choosing residential property, and the consequences of making the wrong choice can be event more serious.
Start by drawing up a specification setting out your main requirements. What is essential and what is merely desirable? Our checklist “Choosing a commercial Property” will help.
Discuss your draft specification widely: with your management team, with your existing staff and with your actual or proposed local partners in the country.
You can then circulate your requirements to estate agents who deal with commercial properties in the area. They will be able to give you a good overview of what is available at that time. This can help you refine your requirements.
Remember that premises come and go, so it is likely that what you are looking at will not be what you end up buying. This does not make the exercise a waste of time.
Once you have a list of currently available premises, eliminate any that don’t meet your essential requirements and draw up a shortlist of properties to visit.
Always have at least one senior member of your management team visit the properties. It is surprising how many businesses try to buy or rent without seeing the property! This is probably because of the complications and costs created by distance. You need to get a detailed feeling for the area and for the types of property available.
At this stage, you may want to involve and visit your lawyers and other professional advisers. In fact, it may well be that the lawyers will be well placed to introduce you to any architects, surveyors and other professionals required.
Should you buy or rent a commercial property?
Advantages of buying
- You don’t need to worry about rent increases
- You may be able to fix your monthly mortgage payments for the whole duration of the mortgage, so giving you certainty as to your outgoings
- Your mortgage payments are likely to be about the same as your rent would have been
- Property tends to go up in value over time and your business will benefit from the capital growth
- If the property goes up in value you may be able to re-mortgage it to release additional funds for your business or for yourself
- You will be more free to make alterations to the building to suit your particular business requirements
- Any alterations will add value to your property and not benefit a landlord
- Your occupation of the property will be secure
- You will not risk handing a landlord a thriving and valuable business if you leave the property. If your business has value, it will all come to you.
- Mortgage interest payments may be tax deductible in the same way that your rent would have been.
Disadvantages of buying
- Even if you can obtain a mortgage, you will have to make a substantial deposit towards the price of the property. This ties up money that could, perhaps, be used better elsewhere
- Mortgages are not as easy to obtain as they used to be (but banks are re-entering this field and mortgages are often now available)
- You will have to pay for the maintenance and upkeep of the property: although this is also often a requirement if you rent commercial property
- If mortgage rates change, your mortgage payments could go up: but so could your rent
- If the property loses value, as they did during the crisis of 2007-2012, this will reduce the value of your business
- Owning the property restricts your flexibility: particularly if your business needs to grow into larger premises
- You are in business as (say) a plumber, not a property speculator!
Probably the most significant disadvantage of buying property is inflexibility. If you want your business to double in size quickly it will be much more difficult (and expensive) selling your property and buying another than it would be finding another place to rent.
The pros and cons of renting
The advantages and disadvantages of renting are the flip-side of the advantages and disadvantages of buying!
What kind of premises should you choose?
See, generally, our Checklist: “Choosing commercial Property”.
Some of the issues to consider are:
- How much room do you think you’re going to need now and in the foreseeable future?
- If you can afford to buy more space than you need now, will you easily be able to let the extra space until you need it?
- Is the location important?
- Is easy access important?
- Do you need parking?
- Do you need your premises to give a particular image: stability, elegance, high-tech or whatever?
- Do you need lots of storage space? If so, it can be cheaper to buy one unit for your active business use and another (much cheaper) for the storage of things that you will only need to access rarely.
- Do you want a modern building or a traditional/historic building? Modern buildings are generally much cheaper to run.
- What are your requirements for power, water and broadband? Will this be available in this building?
- Does the building already have a licence to be used in the way in which you want? If not, will it be easy to obtain?
- How much will it cost you to repair and improve the building.
Most businesses will have an idea of their priorities when it comes to choosing commercial property. It is worth examining them thoroughly to make sure that they truly meet your needs. Later relocation is very expensive, both in money and disruption.
Location is even more important for commercial buildings than it is for residential buildings.
- Is there any legal restrictions on the areas in which your business can operate?
- Is ease of access important: for example, access to major roads or to public transport?
- Is there a local culture of gathering similar businesses in one or a few streets?
- if so, do you need to follow that tradition?
- Do you have any specific requirements for power, water, drainage, broadband etc? Can these be achieved is the location you are considering?
- Is the proposed location safe?
- Does the proposed location suit the image of your business – or does that not matter?
- Do you want to be close to or far away from your competitors?
The price you will pay for the building can vary dramatically depending on its location. For example, a shop on a main shopping street or beach-front location can be five times as expensive as a shop in a second or third-level location.
Do you have a requirement to be in a particular place? If not, you can save a lot of money by choosing a place only a few hundred metres away from the prime location – and often get the side benefits of easier access and more available parking.
Finding the premises
Most of the larger estate agency firms deal with commercial as well as residential property.
Legal steps and due diligence
A contract for the purchase or rental of commercial property is likely to be a lot more complex than a contract for the purchase of a house and so, unless you are very experienced and your local language is fluent, you would be foolish not to use a lawyer to assist you.
There are a number of steps that will need to be taken before you sign a rental or purchase contract:
- Your lawyer will check that the property has all of the permits and licences necessary to use in the way in which you want or that they will be easily obtainable.
- If the licences are not already in place you may try to negotiate a holding contract – either an option to buy or a contract with a ‘get out’ clause saying that you can cancel it if you don’t get the necessary permissions.
- You will probably need to do a survey (inspection) of the building. This will not only look at its structural condition but also at the questions of whether you will be able to obtain adequate electricity, water, drainage, broadband, telephone and other services on the site and whether your proposed use is likely to create any special environmental or other issues.
- You would be wise to obtain detailed estimates for any improvement works, repairs or decorating that you intend to do to make sure that the overall cost of the project is within your budget.
- Depending upon what you intend to use the premises for, you may need other professional advisers such as hotel or restaurant consultants.
See our country specific guides.
Raising the money
As already indicated, if you are buying you are likely to need to find at least 30% and probably 40% of the price of the property from your own resources. You will also need to find all of the cost of improvements, repairs and redecoration and the legal and other fees involved in buying the property. Your lawyer will be able to give you an estimate of fees and taxes early on in the process.
If you are new to the area – for example, if you are moving to there for the purposes of setting up a business – finding a bank to lend to you can be difficult to the point of impossible. If you have only just arrived in the area and have little or no experience in this type of business, you will probably not be able to obtain a mortgage at all.
Most people buying a commercial property will seek to obtain a mortgage on it.
Mortgages on commercial properties are usually from 10-20 years in duration. The norm is about 15 years, though this varies from country to country.
Which is cheaper – buying or renting?
Obviously, this all depends on your particular case but there is a general rule of thumb that says that the overall cost of buying a property – mortgage, legal expenses etc – will be higher for the first five years that you own it than you would pay by way of rent. For the second five years, the figures will probably be pretty much the same. For the third five years and beyond, ownership will probably be cheaper than rental.
Buying commercial property for investment purposes
Recently, any property investment – including investment in commercial property – has been a bit of a roller-coaster ride. After years of steadily rising commercial property values, the crash of 2007/8 saw them fall by up to 50% – and in some cases becoming totally unsaleable due to lack of demand (and so, in effect, worth nothing at all) – leaving lots of owners with large losses and/or properties they couldn’t get rid of.
Prices in most places have now begun to rise again and the price of prime property – top quality office blocks, shops, hotels etc in the best locations – is now (June 2017) often almost back at 2007 levels.
Is the increase going to continue or have the price rises gone too far with the result that there will be a downwards correction? Frankly, nobody knows. The consensus of professional advisers is that commercial property prices will, in most countries, continue to grow for the next few years. This is based on the analysis that there is very limited availability of top-quality property and that the growth of local economies is generating more demand than there is supply.
If you are thinking of investing in commercial property, you will need to decide which particular type of commercial property is of interest to you. Some smaller investors buy individual shop or office units in secondary locations whereas others swear by prime prestige stores and hotels. Obviously, there is a big difference in the cost of these approaches!
Rather strangely, in Spain the rental yield you can expect is often pretty much the same whichever type of unit you buy. However, those who sing the praises of prime property will tell you that they have fewer problems collecting the rent, fewer voids and much less trouble selling the property when the time comes.
The key issues
If you’re thinking of investing in commercial property there are four main things you need to bear in mind:
- Volatility. The market has proved that it can go up and down quite violently.
- Diversification. Because of the higher cost of much commercial property you have to be very rich to build up a diversified portfolio and so you’re exposed to the danger of something going wrong with your one building.
- Liquidity. It will always be slow – months not weeks – if you need to sell your commercial property. In bad economic times it can be virtually impossible to do so.
- Management. The success or failure of any commercial property project depends on good management. You will probably not be willing or able to manage the property yourself, at a distance of thousands of miles or kilometres, and so you will need to find a good, reliable property management company.
Whether you decide to buy or to rent your commercial property, a combination of a lot of thinking on your part, a good estate agent and a good lawyer will make the process as painless as possible.