Is it time to add commercial property to your portfolio?

A property portfolio can be a pretty sound investment – with returns that outstrip savings accounts and other alternative ways to make your money pay. But don’t simply think of property in a domestic sense. Commercial properties can be a lucrative addition too and this sector requires full research to understand its potential.

Here’s our guide to some of the key strengths and weakness of this investment that need to be weighed up when making a decision…

Strong returns

The values of commercial properties took a big hit during the economic crisis and, unlike those in the residential sector, have taken a long time to recover.

In many areas, such properties were still more than 40 per cent below 2007 prices by June 2013. At the same time investors could expect to earn a much higher yield on these properties than their pre-recession price peak. Some areas – such as the East Midlands - are particularly ripe for investment, with potential yields of seven or eight per cent for properties that are on the market for 40-50 per cent less than eight years ago. The best returns – as a percentage – are certainly to be found outside of London.

More than one way to invest

There are ways to get into this type of investment without the need to buy a property outright too. This is often attractive to private investors and takes away some of the risk at the same time as opening up better opportunities. This normally involves collective investment schemes, such as a unit trust, Oeic or investment trust. These invest into a portfolio of commercial properties such as supermarkets and offices on your behalf. 

Down side

The high street undoubtedly took a battering from the economic crisis. However, the reason that commercial properties have been slow to recover in some parts of the country is because the retail sector has also been hit by the impact of the internet as well. Big offices also lie empty in towns and cities where outsourcing and downsizing have been necessary for big companies. Newer, smaller start-ups might well not want this sort of property.

Bricks and mortar tend to be less important for businesses these days, meaning that any investment in commercial property needs thorough research. High streets, warehouses and offices in parts of the country with capacity for growth do still have the potential for investment, but you have to remember that you are investing in the location as much as the property itself. With this in mind you need to look at the wider picture and be able to read what will happen in the short and medium term as well as considering the supply of such property and whether an abundance of empty properties might drive down value.

That element of prediction can be tough in the commercial sector since it’s tough to consider the demands of shops and businesses going forward, even now the economy appears to be on a more sound footing. This contrasts with residential properties as, no matter how and where people work, there should always be demand for somewhere to live.

Research required

Commercial properties may not have the same ‘wow’ factor as the sorts of stunning residential properties available from the likes of FT Property Listings – but they can be a decent investment when considered as part of a wider portfolio that makes the most of the money you wish to invest.

This investment, even more so than other forms, needs careful research. You have to be sure of the location, type of property and the way in which you choose to invest – either alone or collectively. The rewards can certainly make this worthwhile, but failure to do this homework before you part with your money could prove a problem down the line.