There aren’t many cash buyers when it comes to commercial property development. Anyone involved in this sector usually requires large-scale finance for their projects. Are you looking to develop a commercial project and if so should you even be looking to invest in property development?
If you’d like to understand whether you want to invest in commercial property, you need a clear distinction on what a commercial property is, how it will be developed and whether you can afford to purchase it. Then, you need to consider whether taking commercial development finance is right for you and if the economic forecast makes it a good time to invest.
What is Commercial Property?
Any building or piece of land used for business is considered a commercial property. There are three types:
Shopping centres, supermarkets, retail warehouses, high street shops, car showrooms, pubs and restaurants.
Property built primarily for office use including facilities such as car parking, amenities and other essential services.
Industrial units, factories, warehouses and agricultural property.
Why Invest In Commercial Property?
The commercial markets suggest that those without experience as a commercial property investor, should consider putting their money into stocks and shares belonging to companies who specialise in commercial property.
Does this mean it’s a good time for new investors to make the foray into commercial properties? Should they hedge their bets by investing in companies for whom this is a specialist area?
The answer to this depends on the type of commercial property you are seeking to invest in. A commercial property is defined as one from which you make a profit, either from capital gains or rental. This covers everything from buying or renting out a garage, purchasing a shopping mall or hotel.
A first time commercial investor is more likely to be at the bottom end of the scale, in the buy to rent market. The above advice is less relevant to them than to those with a pocketful of cash and dreams of owning their own luxury spa hotel.
Property development has become to mean purchasing a property to make improvements on it, thereby increasing its value and selling it on for a profit.
But it can also be an efficient long-term investment vehicle. Such as improving a property in order to establish future rental income from it.
Developing a property involves making realisable plans, utilising a budget effectively and making shrewd decisions on what improvements to make and how much to spend on them.
Presently, the property market in the UK is back on its feet after several years in the doldrums. Homes are selling quicker, vendors are getting closer to their asking prices and the future is looking rosier than it has for a long time.
Property development has never been so popular, which suggests that the commercial property finance sector is also competitive.
How To Use Commercial Property Finance
Despite a number of factors that could have dented this sector of finance, it is still buoyant. London commercial property is still sought and there seems to be plenty of appetite for moving business’ to new developments, away from the capital too.
The property development sector is a short-term finance sector, funding is usually a short-term loan that enables funding for the identified development or new-build project. As a rule, lenders will look to loan up to 70% of the gross development value of a project.
Having an appropriate form of finance agreement can make your property development project run smoothly and hassle free. There are many different finance platforms, so work out which suits your needs best.
Finance terms are usually arranged for a shorter period than commercial mortgages, typically between 6-18 months, although this will depend on the size and scope of your project.
The terms of your property development finance are dictated by the following aspects:
- Location of property
- Design quality
- Analysis of use and demand
- Pre-letting of tenants
- Experience of borrower
- Loan size
- Loan duration
- Equity provided by the borrower
- Property yield (including lease terms, maintenance and income)
It is important for lenders (and/or investors) to understand and agree to the valuation, the lease conditions, repair and maintenance costs and the current and future market expectations.
Commercial Property Finance Rates
There aren't always set rules for this sort of finance. A lender will assess each application on its own merits, before deciding the terms of the finance.
Each development is viewed separately; the first step is to judge how you can finance your property development and the second is applying for your property development finance.
Every successful property developer needs to fully understand, plan and mitigate for each aspect of their project from the planning stage through to the financial projections of their development.
Why Yield Is The Secret Sauce of Property Finance Investments
One of the biggest considerations for both developer and lender is yield. It should be a major factor when it comes to investment woven into the planning, finance application and agreement stages.
This consideration is influenced by other factors too; the tenant covenant, age of the building, lease length and prospects of re-letting or re-sale in the future.
When yields are low, especially on ultra-prime locations, the question must be asked as to whether capital growth is possible for short or medium terms.
Those who acquire UK wide investments, carrying a high yield from making the decision to go in early to develop in areas forecast to prosper, can deal with it easier when demand begins to exceed supply. While this drives down the yield there is a prospect of capital growth through the yield shift.
Rising and Falling Yields
Before the financial crisis, commercial properties enjoyed a significant run and there was plenty of advice on investment in this sector.
However, financial opinion saw this leading to an excessive demand that ultimately drove down yields. At the same time, this forced a rise in capital values. With inevitable corrections in value - coupled with the huge financial crisis, it saw financial losses in excess of 30-40%.
The prime property market in central London is reaching similar levels. Many experts believe it is about to overheat. However, this should be viewed with caution due to the source of the information.
The basis for this seems to come from conversations taken between fund investors and those high net worth individuals who are being constantly outbid on the stock. They also complain that it’s getting harder and harder to secure such a property.
The number of bidders for prime property, both in London and regionally, has increased by a huge margin, particularly in the overseas sector with investors looking for a safe haven for their money. Life clearly does not grind to a standstill outside of the M25.
Right across the country, there are countless businesses who neither need nor want to base their company's within the capital. This, in turn, yields great opportunities out of the city and into the sticks, so to speak, in terms of investment in commercial properties.
Depending on location, yields can come within a hair's breadth of double digits. If it's income you are seeking, these locations could be exactly what you are looking for.
Property Finance and Buy-To-Let Market
If we look further at the buy-to-let market for the moment, which has changed dramatically as the housing market has readjusted itself. Landlords were snapping up cheap properties and making a killing just a few short years ago.
The situation was clear, people were desperate to sell rather than risk repossession as the recession kicked in.
But the economic outlook has changed. Many have found that property prices have risen quickly in their locale and are finding it harder to add to their portfolio. There are still bargains to be had if you are happy to go further afield and are prepared to be a landlord at a distance.
Landlords who buy now must be prepared for a smaller yield due to the rising house prices. They cannot, however, raise their rents to cover this as in order to attract a tenant it has to be in line with similar properties in the area. There is also the possibility that a rental property could stand empty for months as, with the economy getting back on its feet, the housing shortage is reducing drastically and at quite a fast pace.
Is Commercial Property Development For You?
It is very likely that the ultimate winners in this sector will be those who are able to identify sound commercial property investment opportunities, outside the boundaries of the institutional markets.
In other words, these are the ones who will be investing in the bricks and mortar rather than the stocks and shares.
So yes, now is the time to invest in the UK commercial property market. Providing you do so with a little savvy, you can still get fantastic deals and it can be a fantastic investment.
Why not talk to use at Access Finance about Property Finance solutions whether you are seeking a better commercial property deal or looking to invest in the sector and want to know more about your financial options – we’d love to hear from you! Call today on 03330 069141.