Buying the right commercial property

5 May 2015

Finding suitable premises is a vital factor in the success of any business. Here we look at the initial considerations to take into account when looking for a commercial property.

The latest quarterly Commercial Market Survey from the Royal Institute of Chartered Surveyors (RICS) shows that demand for commercial properties has risen for ten consecutive quarters. It’s not just investors who are buying, either – RICS observes that occupier activity is at its highest in 17 years.[1]      

It would seem, then, that more and more businesses are making the crucial decision to purchase their own premises. But just as important as making the decision to buy is ensuring that you choose the right commercial property.

Initial considerations

What do you need from your premises?

Broadly, there are two things that your commercial property should do: enable your business to operate as effectively as possible, and keep costs down.

You therefore need to draw up as specific a list as possible that will outline how you can best achieve this. To do so, you need to think about your business requirements:

  • Accessibility. Can your workforce easily access the premises, and is there adequate parking? If customers will be visiting the property, are you accessible and visible to them? If you will be shipping and/or receiving goods, will you be close to transport links?
  • Comfort and sanitation. Are there adequate kitchens, toilets and break areas for your staff? Do you need sanitation facilities and waiting areas for customers?
  • Layout and space. Under UK law, a room in a commercial building should be sufficiently spacious that every staff member is allowed a minimum of 11 cubic metres[2]. This refers to unoccupied space, so businesses with more equipment will naturally need more space per employee. You may also have special requirements; many manufacturing businesses require open-plan premises and high ceilings, for instance. Your property will need to be well-ventilated and, ideally in most cases, well-lit by natural light.
  • Utilities. You will need to consider drainage, power and water, as well as telecommunications and IT networks. Ensure that the supply is sufficient for your premises and that the cost is within acceptable margins. (You should always be shown an Energy Performance Certificate (EPC) by a prospective seller.)

As an owner-occupier, you may have more scope to alter your property to suit your needs – though bear in mind that many changes will require planning permission. Always find out if you will need to get planning permission before making a purchase.

Will your needs change?

Over time, your business needs may change. Perhaps you will wish to expand, or maybe your business model will change to adapt to market shifts and changing customer needs.

This eventuality is possibly the biggest downside of owning, rather than renting, commercial property. Your long-term flexibility will be hindered by the fact that you have equity tied up in your property.

It might be possible that you can make alterations to your property to accommodate your changing business needs. If you envisage this happening, try to find a property subject to as few planning restrictions as possible. Subject to the terms of your commercial mortgage and depending on tenant demand, you might also be able to rent out part of the property that you no longer use, eliminating wasted space and generating an income on the side.

Finally, you might be able to sell your property or rent it out in its entirety.

What are the initial costs?

When buying your property, you will incur some or all of the following costs:

  • Building and contents insurance;
  • Decoration and refurbishment;
  • Initial structural alterations, including those needed to bring your workplace in line with current regulations (building, fire and health and safety);
  • Purchase costs, including your commercial mortgage deposit, building surveys and conveyancing fees

Chances are that you will need to fund the acquisition with a commercial mortgage; however, you will still need to put down some capital of your own. You will need to meet most costs outside of the purchase itself, plus a deposit worth at least 25% of the property value.

A healthy market means that a wide variety of commercial mortgages are available, with competitive annual interest rates, flexible terms and repayment options and broad lower and upper lending limits. Do be aware, however, that a mortgage is a binding agreement, and that if you don’t keep up repayments your property may be repossessed.

For help choosing from a wide range of options that will suit your immediate and long-term business needs, consider contacting a professional commercial broker.

Written by Ben Gosling for Commercial Trust Limited

References

1. Rubinsohn, S. “Surge in real estate investment and tenant demand points to strengthening economy”. RICS. 28 Apr 2015.

2. The Workplace (Health, Safety and Welfare) Regulations 1992, SI 1992/3004 Sch 1 para 3

Your property may be repossessed if you do not keep up repayments on a mortgage secured against it.

Some commercial mortgages are not regulated by the Financial Conduct Authority (FCA).