Some areas of the commercial property sector took a big hit as a result of the pandemic. Offices were left empty and many workers are yet to return full-time to their desks. Retail has long struggled to find its place in an increasingly online world, while industrial sectors are facing numerous challenges stemming from the pandemic, Brexit, and the rising cost of materials and energy. All in all, it’s a tricky time that is going to require resilience and creativity to overcome.
Despite this, commercial rental yields are holding strong and remain higher than residential yields. Across England, the average price for commercial property is £968,177 while the average monthly rent is £4,806. Resulting in an average yield of 6%.
In the South East yields are averaging as high as 8.6%, followed by the North East (8.1%), East (7.4%), West Midlands (5.7%), and East Midlands (4.8%).
In terms of commercial stock availability, the South West is home to the biggest abundance and the region currently accounts for 16% of all commercial stock listed for sale.
This is followed by the North West (14.9%), East (12.8%), South East (12.5%), and East Midlands (11.9%).
Pros and Cons of being a commercial landlord
Becoming a landlord is a big decision. For non-professionals, the immediate thought is to enter the residential market, but investing in a commercial property is something that more people might want to consider and something that is becoming increasingly more accessible with the help of peer-to-peer platforms, in particular.
Pros
When buying a residential property, it is, in the vast majority of cases, going to be empty. This means first refurbing the property and then finding tenants. With commercial property, however, it is common for existing tenants to remain in place even when ownership of the property changes hands, thus reducing the initial void period and all of the admin that comes with finding the first tenant.
However, there are also benefits to sourcing a new commercial tenant. With a residential property, rent is usually paid one month in advance. With commercial rentals, tenants will often pay three months in advance, thus creating a more reliable and immediate revenue stream.
In the same vein, commercial leases tend to be longer than the 12-month average common with residential rentals, with tenants often signing up for years at a time.
Whereas residential landlords are responsible for paying all maintenance and repair bills for their property, commercial leases often state that the tenant bears this responsibility and all associated costs.
Cons
Despite these advantages, there are, of course, some downsides to commercial investment.
When a tenant vacates a commercial property, it often takes the landlord much longer to find a new tenant than it does in the residential sector. And once a tenant is identified, the due diligence, checks and processes involved mean it can be a long time before they actually move in.
Commercial tenants can run out of money - go bust. When this happens, it can be difficult and pricey to remove them. Plus, with higher average rent, arrears can be far more costly for the landlord.
Finally, the overall processes and legal elements of commercial leasing are far more complex than in the residential sector. This means they’re more expensive to complete and that the timeline of getting a new tenant into the property and paying rent is much longer.
Almas Uddin, founding Director of Revolution Brokers, commented: “The pandemic has hit many areas of the commercial sector for six and it’s fair to say that both office units and retail outlets were some of the most seriously impacted. Despite this, commercial rental yields remain very favourable and at present, the primary issue facing commercial landlords is securing a tenant, not the return on offer once they do.
"Despite this and the turbulence of the last few years, it’s an exciting time to get into commercial property investment and there’s now a real emphasis on how commercial spaces can better suit the needs of today’s tenants and their customers.”
