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Commercial investment in property, like most form of investment, is about the return on your money or yield.
There is no romanticism in commercial investment in property and although some property may have development potential, the investor is generally not looking for a short term gain but more important is the strength of the covenant, the nature and length of the leases/tenancies involved (whether they are FRI or internal repairing), the nature and frequency of rent reviews, whether there are break clauses and options to purchase and the availability of guarantor’s amongst other considerations.
Many vendors or their agents express the yield as a gross figure, however, for an investor the best guide is the net yield or yield after costs as this is more realistic to the purchaser of commercial property as it reflects the total outlay to the purchaser.
The ideal investment is to purchase a property with a single long lease (e.g. twenty-one years') on a FRI basis to a "Blue Chip" or "AAA" tenant (e.g. a Bank), in which event overheads and management are kept to a minimum and there are no maintenance costs involved with little risk.
Where the commercial property to be purchased is subject to short lease/tenancy, which may also be internal repairing, the investor must consider administrative costs, the condition of the premises and the costs of repairs as well as void periods and consequently may only consider purchasing with a higher nett yield (in effect paying less for the property).
As to void periods, the state of the market in the properties location at any given time is relevant as to whether any part of the property can be quickly and easily re-let at the end of a lease or if a lessee/tenant goes bankrupt.
The effect of interest rates can never be underestimated too much. Quite simply when interest rates are high and if rents have not kept up with inflation, investment in property may not be as lucrative as other types of investment. When interest rates are low and rents increase at least in line with inflation, commercial investment in property may be lucrative both as to the return it gives and the capital growth.
It must be remembered that there are no guarantees that any investment, whether it be in property or otherwise, will increase and that there is no "safe bet". For the investor, the issue is to minimalise the risks involved, nonetheless, there are always risks.
Like all forms of investment, the investor must take advice from professionals in the relevant field as to the investment he or she is to make.
The above is a general guide to the topic and is not intended as legal advice. Legal advice in relation to a transaction can be provided by contacting us.
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