Purchasing commercial property can be a worthwhile investment if done carefully and with full awareness of the potential risks. As with any major financial decision, it is wise to research thoroughly and consider all factors before committing. Here are some of the key financial risks to be mindful of when looking to buy commercial property.
Hidden Costs
Beyond just the purchase price, there are many additional costs associated with buying a commercial property that can quickly add up. Make sure to account for expenses such as surveys, legal fees, stamp duty, insurance, refurbishment, maintenance, ground rent and service charges. Also factor in costs for any repairs or upgrades needed to bring the property up to the desired standard. Understanding the full scope of costs from the outset is essential to avoid any nasty surprises down the line.
Securing Finance
Unless you are able to purchase the property outright, you will need to secure financing which comes with its own set of considerations. The amount you can borrow will depend on factors like the property value, your credit rating and your business’ financials. Be realistic about how much you can afford to borrow and repay comfortably. Also factor in arrangement fees and interest rates, which can significantly impact repayment costs. Getting independent financial advice is prudent prior to taking out any loans.
Changes in Market Value
Commercial property values can fluctuate, sometimes suddenly, due to factors like the wider economy, local business landscape and property demand/supply. Market crashes like that seen in 2008 can severely impact property prices. Understanding market trends will give you a better sense of potential changes in valuation so you can factor in the risk. A thorough valuation by a chartered surveyor prior to purchase is also advisable.
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Low Occupancy Rates
The income generated from tenants is a key factor in financing and profiting from a commercial purchase. Low occupancy rates due to lack of tenant demand in the area or competition from other properties can heavily impact your return. Carefully assess demand and average occupancy rates in the local area. Also evaluate options to make the property more attractive such as refurbishments, competitive rental rates or additional amenities.
Maintenance and Repair Costs
As a landlord, you are responsible for ongoing maintenance issues and repairs, which can become costly quickly. Older properties or those in poor condition may require urgent repairs that are expensive. Factor in regular maintenance costs as well as emergency repairs that may arise. Also consider any refurbishment needed to keep the property lettable. The potential repair costs are important to evaluate especially with older properties.
Underinsuring the property can have severe financial consequences in the event of a major incident. It is essential to have the building valued not just for market price but also for reinstatement cost – the amount needed to completely rebuild and replace the structure and contents. A reinstatement cost assessment helps ensure the insurance coverage would be sufficient in a worst-case scenario. Underinsuring even by a small margin could result in the insurance payout falling far short of the amount required to rebuild, leaving you to cover a potentially crippling shortfall. Investing in a professional RICS reinstatement cost assessment gives peace of mind that the insurance adequately covers rebuilding costs, preventing major financial loss.
While commercial investment does carry inherent risks, those who take the time to understand and prepare for them are far more likely to realise a successful investment.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or investment advice. While we strive to ensure accuracy, we make no guarantees regarding the completeness, reliability, or suitability of the information presented. Readers are encouraged to conduct their own research and consult with qualified professionals before making any financial or investment decisions. The author and publisher assume no liability for any losses or damages resulting from reliance on the information in this article.
