How Does the HMRC Define a Commercial Property?
HMRC says that commercial property is any non-residential building. This means that commercial property is not where somewhere lives but where someone works. A commercial or a non-residential building can have several forms, such as shops, warehouses, offices, restaurants, agricultural lands, or fuel stations.
The Town and Country Planning Order 1987 has provided with a list demonstrating use classes for all kinds of commercial properties. Moreover, investing in commercial property can be a good investment in the long run.
Buying a commercial property is a great way to ensure financial security for yourself in the long run. Moreover, it could potentially be an excellent way of investing your money. That said, it is not an entirely safe option. For instance, the 2007 financial crisis saw countless property investors getting burned. This shows that investing in any kind of property (commercial or otherwise) comes with its fair share of risks.
In any case, it cannot be denied that commercial property is a crucial asset class that must be considered to spread and diversify investment portfolio risk. Typically, a property is not correlated to other types of asset classes like fixed income (gifts and bonds), equities, and cash. This means that the values of property move independently of any other assets. Also, they are not affected by the happenings in the stock markets.
It is also noteworthy that you can claim capital allowances when buying commercial properties. They are taxed at 10% or 20% as opposed to residential properties, where the CGT ( Capital Gains Tax ) rate is 18% or 28%. Hence, this is another excellent advantage of investing in a commercial property.
In order to be exposed to a property for an investment, you can go about it in several different ways. Let us check them out!
Direct Investment: Direct investment, for private investors, refers to buying a share of or all of a property. When it comes to most people, this cannot be regarded as a very practical manner of getting exposure and access to the commercial property market scene.
Direct Commercial Property Funds: These are also called bricks-and-mortar funds and are commonly used to invest in various kinds of commercial property through a collective investment scheme like an investment trust or unit trust. These invest in a portfolio of different commercial properties directly, such as offices, warehouses, and supermarkets, which are otherwise not accessible to small investors.
Indirect Property Funds: Indirect property funds can be defined as collective investment schemes where investments are made in the shares of several property companies that are listed on stock markets. These do not have the same advantages of diversification as those of direct investment in property. This is because property shares are naturally prone to moving up and down with the movement of the stock market.
Simply put, if you wish to earn from an investment in a commercial property, you can do that in two ways:
It is a known fact that the United Kingdom benefits significantly from its long lease structure, which is considerably longer compared to the US and Europe. The typical length of lease in an office in London is anywhere between 10 and 15 years. In addition to that, the average length of lease across the UK is about eight years.
On closer examination, this is quite longer than a residential property, which tends to have a lease of anywhere between 6 to 12 months. This structure offers much more security as compared to the returns that are offered by shares. This is because the income in this structure is guaranteed for an extended period at a set level.
It is vital to know the demand as well as supply before buying a commercial property. This is because it makes no sense to buy a shop in case all the other shops in the local area are closed. This would simply lead to difficulty in getting tenants.
On the other hand, if shops open frequently but close soon after, that indicates little demand. Hence, it is crucial to match the demand with the supply in all locations that you decide to invest in. Remember that due diligence can save you quite a bit of money at the end of the day. Hence, strike the right balance between demand and supply and do your homework well.
How Can The Property Accountants Of Target Accounting Help You Out?
Our team of experts at Target Accounting can help you understand everything that buying or letting a commercial property entails in detail. Book a call with us to discuss all our property accountancy services you can avail in order to make an informed investment.
This article does not constitute any advice or recommendations and only seeks to express the views of the author. Any investment should be made by seeking professional advice and at one’s own discretion.