Commercial Property is an established and professionalised asset class with a strong rental yield and total return profile. It offers portfolio diversification, and has become an increasingly attractive option to investors looking for a growing income stream in today’s low interest rate environment. However, as with any investment, there are risks to bear in mind.
What are the key risks?
Risk: Property selection – Inexperienced investors may not be aware of a property’s limitations or potential risks to investment performance.
Why we’re comfortable: Our Director of Commercial Property, Xavier Pullen, has more than 40-years of experience in acquiring institutional grade commercial properties, including a 35-year tenure at the LSE listed, Capital and Regional property company where he was a founding director. Read more about Xavier’s experience here.
Xavier and his team will select and comprehensively appraise every property under consideration, supported by our team of analysts who, with access to leading industry intelligence, will assess the strength of the local market and the rental levels and letting track-record of nearby properties. Read more about our current commercial property acquisition strategy and property selection process here.
Risk: A tenant cannot pay their rent
Why we’re comfortable: We will select properties let to profitable businesses with a strong covenant. Our property assessment includes an analysis of the tenant business. Once a property is acquired, we will stay close to tenants and monitor trading so potential problems can be anticipated and mitigated. By acquiring a varied selection of assets, we intend to give investors the opportunity to build a diversified portfolio across tenant companies as well as commercial sectors.
Risk: Rental void periods
Why we’re comfortable: We will acquire properties with a long outstanding term remaining on the tenants’ leases and will proactively seek to negotiate an extension as they approach the final 5 years. By staying close to tenants we will anticipate potential vacancies and manage them accordingly. Our assessment of a property will seek to establish that it will hold appeal to potential alternative tenants and/or have a credible alternative use.
Risk: The building falls into disrepair or requires substantial maintenance
Why we’re comfortable: Unlike with residential property investment, commercial property tenants are typically responsible for repairs and maintenance. The risk is mitigated with a full repairing and insuring lease (FRI) to a robust business.
Risk: If a building becomes economically obsolete and cannot adapt to new requirements
Why we’re comfortable: We will select simple properties with a relatively low build cost (such as warehouses and convenience stores) and look for opportunities with a potential alternative use, such as residential development. In addition, we will avoid offices which are more likely to become outdated from the tenant’s perspective as technology changes the way we work.
Market risks and how we mitigate them.
Risk: Property prices fall due to an economic downturn and business contraction which increases default and reduces demand for commercial premises
Why we’re comfortable: We will focus on diversification and tenants with strong businesses across a wide range of sectors. Our strategy includes allocating capital to alternative sectors where the underlying drivers and market perception of their value, are not closely linked to the short term economic outlook, e.g. well located convenience stores, doctors’ surgeries, other healthcare properties, nursery schools. We won’t over-extend leverage, mitigating risk of foreclosure if values fall sharply.
Risk: Interest rate increases, impacting the cost of servicing debt, reducing income available for distribution to investors on geared properties
Why we’re comfortable: Interest rates are typically increased to control inflation. Given that Commercial property rents usually move in line with inflation, this provides an element of protection against rising interest rates. Furthermore, we will seek leases with contracted, upward only rent reviews. We will also ensure an initial income coverage ratio of at least 200%.
Important notice: Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Forecasts are not a reliable indicator of future performance. Gross rent, dividends and capital growth may be lower than estimated. 5 yearly exit protection or exit on platform subject to price & demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary.
Financial promotion by London House Exchange Limited (8820870); authorised and regulated by the Financial Conduct Authority (No. 613499).