With the States of Jersey introducing the new stamp duty tax on 2nd home ownership, and costs of financing currently being as high as they are, is it time historically residential property focussed investors look at the commercial market? We think so, and below is why.
At a glance, commercial investments provide the following benefits:
- On average, longer lease terms allowing more predictable income streams
- On average, higher income yields – returns in the region of 6% – 10% whilst residential is circa 3% – 5%.
- Less turnover of tenants/occupiers and the associated costs of dealing with this
- Regular, upwards only, rent review patterns
- Potential for higher capital gains
- Allowances for owners to recover maintenance and other costs from the occupiers
- Lower stamp duty
- More flexibility in lease terms – fewer consumer protection and government laws
- No issues of smokers/pets/children (tongue firmly in cheek).
With a commercial property agent acting for you, they can provide a purchase report to justify property value and give you solace that a property is worth what you are paying for it. Commercial property agents will have excellent market knowledge and know what rentals and sales have occurred in the market and can use these to justify or counter property pricing.
We also feel that it is prudent to mention that, as a commercial landlord, you’ll usually only have to work during business hours. By comparison, residential landlords can be on call 24/7 and might have to resolve issues with the property outside of working hours. Also, in a lot of cases, a commercial landlord will instruct a managing agent who will deal with the day to day running of the property, and the costs of this can be recovered from the tenant.
The majority of commercial surveyors/agents and property managers are RICS accredited meaning there are global standards they have to abide by along with a code of conduct.
Tenant choice is also a big part of commercial property investment with better tenants (stronger covenants) usually increasing the value of a property (yield choice). Tenant’s will usually undergo more extensive background checks and deposits/guarantees can be provided for additional security. Also, as commercial tenants are commonly professional business owners, it is expected that they will treat the property better and keep it in better repair. For example, retail tenants have a vested interest in maintaining their store and storefront as if they don’t, it will affect their business.
There are many reasons why investing in commercial properties is potentially a better option than investing in residential properties. From the higher potential for return on income, stable cash flow, diversification and longer-term leases, commercial properties offer a unique and attractive investment opportunity for many investors. Of course, investors should carefully consider their options and seek professional advice before making investment decisions.
If you have historically invested in residential property or are interested in learning more about commercial property investment, please get in touch.