Commercial property usually costs a great deal more than residential property. Although it’s possible to buy small, individual shops and offices at prices comparable to residential properties, the cost of large, high-quality commercial assets, such as shopping centres, office blocks or large industrial premises, may run into hundreds of millions of pounds.
For most personal investors, collective investment schemes represent the only way to get exposure to commercial property.
In addition the uniqueness of most commercial properties, outside of high street shops or industrial warehouses, makes it difficult for investors to get an accurate valuation without specialist help. Professional, technical advice is crucial for anyone considering direct investment in commercial property.
Another significant difference is the way the lease between landlord and tenant operates, particularly given the following:
- Commercial leases tend to last much longer than residential leases - five years or more versus an average of one year (although residential leases tend to be more readily renewable). However, residential property can often entail a higher level of voids than commercial property because of the shorter lease period.
- Commercial property leases have traditionally contained clauses dictating that rent reviews are 'upward only', meaning a property's rent can't be less after review than it was before review.
- The legislation surrounding landlord and tenant relationships is different for commercial and residential leases.
- The responsibilities for repairs and maintenance are different; in commercial properties tenants are typically responsible for these costs, while in residential properties landlords are typically responsible. For landlords of residential properties, these costs can absorb much of their rental income - perhaps more than 30% in some cases.
Residential property is also likely to require more management time (and/or cost) than commercial property. This is because of smaller unit sizes, shorter lease lengths, and a greater obligation for maintenance and repairs.
Finally, the make up of income is different for commercial and residential properties. For commercial landlords, the income from rent is a much greater factor than for residential landlords. For residential landlords - both institutional and retail - there is a need to regularly sell a proportion of their properties in order to realise the increase in capital values to supplement the income from rental.
