Commercial Property: Your 2024 Investment?

Posted on 9th November 2023

Looking for a new avenue to invest in for 2024? Most people looking to invest in property are immediately drawn to residential projects – those looking to invest are typically homeowners and want to stick to what they know. However, investing in commercial property can provide a more robust, long-term and diverse income – when done right.

Here, the commercial finance experts at Anglo Scottish take a look at why commercial property could be a great investment for 2024.

Why invest in commercial property?

In many cases, commercial mortgages are taken out by a business who already rent and operate out of an existing premises. Typically, these businesses don’t want to keep renting, and would rather purchase the building as an asset. In many cases, the mortgage payment can be a similar amount – or even cheaper – than their monthly rent.

However, commercial property represents a lucrative investment opportunity for people looking to increase their income or diversify an existing property portfolio. Commercial property offers an attractive new avenue for people looking to offset the risk associated with solely owning residential homes.

Commercial buildings often have multiple tenants, meaning multiple streams of income. Office buildings, for example, could host various different businesses, providing a stable cash flow and increasing your investment’s resilience in the event that one company goes under.

The application process

If you’ve ever invested in residential property before, you’ll notice plenty of similarities in the process. However, there are some key differences about commercial property which must be understood in greater detail before investing.

The application process for a commercial mortgage tends to be far more complex than your typical residential mortgage. Whilst standardised commercial mortgages do exist – as you’d see in the residential world – you should be prepared to provide a greater level of detail and documentation when applying for a commercial mortgage.

You should also be aware that you’re likely to pay a larger initial deposit than you would for a residential building. You can typically expect a deposit to be 5-10% of a home’s value for a residential mortgage, compared to 20-40% for a commercial one.

Lease lengths

Commercial mortgages can offer a more long-term source of income than residential – with less occupant turnover. Should you invest in a residential property to rent out, a typical lease length is six months to a year.

Residential tenants may rent the same property for a number of years, but the lease is typically renewed every twelve months. This means more admin for you and less long-term security.

Though it depends on the type of commercial property you’re looking to invest in – whether it’s a retail, industrial or office space – lease lengths are typically longer. As per data from 2020, the average length of a retail lease was 5.5 years, with plenty of retailers opting for a longer lease of ten years.

Stuart Wilkie, Head of Commercial Finance at Anglo Scottish, comments: “It may be financially beneficial to opt for shorter leases and renegotiate terms over time, but if you’re looking for a ‘set it and forget it’ investment, commercial property could represent a more reliable source of long-term income than a residential property.”

Interest rates

In the UK, an estimated 60% of businesses fail in the first three years. Because of this fact, commercial mortgages are deemed to be riskier than a residential mortgage. Straight off the bat, you can expect to pay a higher interest rate on a commercial property than a residential property.

You can expect your commercial mortgage to offer better interest rates than a traditional business loan, however, because property must be put up as collateral. The interest on a commercial mortgage is tax-deductible, too.

It is possible to get a commercial mortgage with either variable rates or fixed rate, just like a residential mortgage. The majority of deals at present are likely to be done with a fixed rate, though the outlook for variable rates has improved in recent months.

Though mortgage rates have fluctuated significantly over the last twelve months – particularly at the start of 2023 – the Bank of England unexpectedly held UK rates at the end of September, causing UK mortgage rates to fall.

Therefore, the mortgage rate outlook for 2024 is looking more positive at present – but any potential investors should be aware that commercial mortgage rates are subject to change, just like a residential mortgage.

Wilkie comments: “Commercial property seems to be an attractive investment for the coming year, now it looks like interest rates are beginning to settle down. A decision like this takes a lot of thought, however, so always make sure that you’re getting good terms and investing in the right property.

We’d always recommend working with a dedicated finance broker to help connect you with the right finance arrangement for you and assist with the initial funding of your property.”