Is it a good time to buy commercial property?

Image of commercial property.
Tuesday November 2, 2021

With many workers returning to the office, businesses are re-evaluating their office strategy. Before deciding on whether leasing or buying an office suits your financial means and business model, consider the following points to work out whether investing in an office will be a fruitful venture for you long-term.

Most real estate investors decide on an investment property based on two things: the yield and the liquidity of the property. Identify the characteristics that make it a more liquid investment. Assess the covenant strength of the property and pick an established office market with multiple interested buyers. In terms of assessing rental values, remember that there is no rule of thumb which can be applied. Each market has a sub-market which needs to be assessed on its own right.

The pros of buying office space

  • Building equity: Buying an office space gives businesses the opportunity to increase their equity through strategic investment, assuming that the property owner has undertaken their research into which locations and types of property can best guarantee a constant stream of leaseholders. As businesses repay their borrowing, their ownership stake in the property asset increases, and can be used as collateral in the future.
  • Appreciation: Property is considered one of safest asset classes for a long term investment because real estate tends to steadily appreciate, or grow in value over time. Office buildings in particular are the first port of call for property investors due to their high yield rates. However, it is worth noting that all investments come with associated risks, and in the instance of property, those risks are likely to include problem tenants, unpredictability, and negative cash flow. Although the pandemic has impacted the property market, the return to work and the reopening of city centres has resulted in many markets returning to normal levels of activity. The Financial Times has reported that global investors have earmarked between £40bn – 50bn to invest in the London property market, which is the highest volume of cash since investment tracking began in 2012. This suggests that, despite the volatility of the last 12 months, office spaces remain a safe and profitable investment.
  • Fixed costs: When businesses buy an office space, if they appoint a trusted commercial mortgage specialist, they are typically able to fix their mortgage rates. Many businesses appreciate the security and predictability presented by being able to pay fixed costs and find it useful for commercial planning.
  • Tax efficiency: Commercial properties generally qualify as a business expense and are fully tax deductible. Do seek professional tax advice before embarking on a commercial office venture.
  • Branding: Buying a commercial property allows businesses to build their own company culture. Being the freeholder enables landlords to design and build the fit-out of the building and establish their own corporate identity. As a freeholder you have the flexibility to adapt to the needs of occupants and their own business alike.
  • Passive income: Although buying a commercial property is seen as a long-term investment, many businesses can make a significant passive income stream through partially or wholly renting out their office space.

The pros of renting office space

  • Lack of certainty: If a business is relatively new and future growth remains uncertain, renting can offer flexibility and the ability to upscale once the business has a constant stream of income.
  • Quick turnaround: If a business needs to find a premise in the next 30 to 60 days, renting is a much faster option than buying.
  • Affordability: If a business is low on capital, renting requires a much smaller down payment than buying an office space outright.

If you’re interested in investing in expanding or remortgaging your commercial property portfolio, Large Mortgage Loans are here to help. We provide creative solutions for sophisticated financial portfolios. Find out more about our commercial property offering here.

How to future-proof your office space

Once the decision has been made to invest in an office space, it’s worth taking some time to consider future-proofing the investment.

As previously mentioned, the quality of a company’s office space can have a huge impact on employee engagement and wellbeing. When providing his advice on how to increase the value of the property, Charles Ayton Senior Commercial Manager urges businesses to develop amenities which will increase employee wellbeing, and allow offices to function as social hubs, rather than simply workplaces: “Forward-thinking landlords should look at buying or developing offices that provide amenities that take wellness on board. For example, adding bike storage and shower facilities, social areas and lots of natural light.” While rental offers flexibility, buying an office offers the ability to perfectly customise an office space to fit the needs of an organisation’s particular wellness policies and working patterns.

Sustainability is another pressing concern which business owners must address. The growing climate crisis has caused many companies to increase their commitment to doing their bit to tackle the climate crisis. Many business owners are putting sustainability on top of their list of requirements when searching for a new office space, and demand for low carbon office developments is expected to soar over the next few years, as financing flows to net-zero projects. Making sure an office space is as green as possible could be a vital consideration in future-proofing commercial property investments.

Ultimately, there is no single answer for whether a business should purchase or rent their next property. No matter what option is chosen, Charles Ayton, Senior Commercial Manager for Large Mortgage Loans, urges business owners to plan their property strategy carefully. In his view, decision makers should “assess their office and create a clear roadmap for the future, approaching it in the same way as a marketing plan.” Considering these factors now will ensure that an office space is well equipped to meet the needs of the workers of tomorrow and will remain a profitable investment for decades to come.

Here at Large Mortgage Loans, we can help business decision makers carefully assess their priorities and will design a custom finance solution that will help your organisation achieve their goals. 

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