Real Estate Alliance

Real Estate Alliance Takes the Mystery Out of Investing in Commercial Property

The rise of the first time commercial investor is the fastest-growing phenomenon in the property market in Ireland at present. Investing alone, or in small syndicates made up of families, friends or work colleagues now accounts for between 35% and 40% of all commercial sales for Real Estate Alliance members.

The impressive returns, of up to 9%, from commercial property makes investing a very attractive alternative to traditional pension funds. Banks too are more enthusiastic about lending money for commercial investment. The security of long-term leases and strong rentals due to rent reviews, plus prices for properties starting as low as �250,000, makes it a realistic investment opportunity for more and more investors.

However, investing in the commercial sector can be a daunting prospect to the first-timer. Real Estate Alliance has lifted the lid on investing in the commercial sector with their 16 tips for first-time commercial investors, which act as a guide to anyone considering venturing into this potentially lucrative arena.

Real Estate Alliance�s Tips for First Time Commercial Investors

1. What are your aims?
Identify your motives for investing in commercial property. Is it the security of bricks and mortar? Is it pension planning? Then pinpoint the kind of commercial investment that best suits this, be it retail, industrial, or office. Remember, commercial investment property should always be considered a medium to long-term investment, due to the higher initial costs of acquisition.

2. Do your research
Research your chosen investment carefully. Observe similar transactions to establish market trends, for example where local adjoining shops/offices/warehousing has been sold nearby.

3. Talk to your local Real Estate Alliance agent
You�d be surprised how many properties never get advertised to the public. In fact the best ones are often acquired shortly after the current owner decides to officially put it on the market. Real Estate Alliance members have their ear to the ground and are often the first to be instructed by a vendor

4. Get sound financial advice
Talk to an accountant and at least two lending institutions to find out the most tax-efficient way of investing. Identify how secure or low risk your investment will be. Know what kind of time frame you are looking at before buying and what percentage return on the investment you can expect.

When you know all this, decide how much of a percentage of the purchase price you need to borrow. Be conservative with your initial figures, but remember values are often increasing substantially each year so you might be able to afford to purchase more than you initially think.

5. Include the hidden costs in your calculations
Don�t let the price of the property versus the rent be the sole defining factor. There are hidden costs, such as stamp duty, management fees and service charges. Take a look at the table below for non-residential property stamp duty.

Aggregate consideration	Rate of Duty
Up to �10,000	Exempt
�10,001 to �20,000	1%
�20,001 to �30,000	2%
�30,001 to �40,000	3%
�40,001 to �70,000	4%
�70,001 to �80,000	5%
�80,001 to �100,000	6%
�100,001 to �120,000	7%
�120,001 to�150,000	8%
Over �150,000	9%

6. Check the rent review clauses and the lease
Avoid leases with what�s called early �get out clauses� that allow tenants to terminate early. Check the lease, to ensure rent reviews are timely. Never consider indexed linked review clauses, open market rental value traditionally gives better return and capital appreciation over the years.

7. Be realistic, high yield equals higher risk
Approach the establishment of a commercial property portfolio as you would build a house � a good foundation is essential. Then as you gain greater experience, and build up equity within the portfolio, look at higher yield, higher-risk opportunities.

At present you should expect yields in the region of 3-5% for retail, 4- 6 % for office and 5-9% for industrial properties. The office market in particular is emerging from a period of oversupply so the coming years may see this improve as an investment type, but bear in mind that many now run their offices from home with technology such as broadband/computers/email dominating our world.

8. Check out the V.A.T. situation
Before buying a commercial property, you should know its V.A.T. status, as this can be a substantial extra cost. Also take taxation advice on whether to become V.A.T. registered beforehand.

In most commercial property the purchase price is subject to V.A.T. Once registered, you may have to charge V.A.T. on the capitalised value of a long-term lease at 13.5%, or on the rental of a long-term lease at 21%. Some tenants may not be in a position to reclaim V.A.T. and will need to be told that a lease is subject to V.A.T. on the rental or on the creation of a new lease. Consider also the knock-on effect on other short-term lettings within your portfolio where V.A.T. could also apply (including sometimes residential lettings).

9. Find the best location possible
Go for the best location you can get. Find out about new future developments being planned � will a new edge of town shopping centre undermine the value of a high street location that you are looking at? Ensure that there�s a future market for your property so find out about nearby facilities such as hospitals, colleges, and employment trends. Find out about whether further improvements are prohibited by any current planning laws. Find out whether new retailers or other businesses are coming to the area. Remember this is a long-term investment, the extra time and effort will be well worth it.

10. Analyse the property yourself
Inspect the property yourself with your Real Estate Alliance Agent adviser. If you like it, then take further independent professional advice on its viability from your accountant, solicitor and engineer. Decide whether you want to buy a new vacant building or an established property with existing tenants.

Also look at the building from the tenant�s point of view. Tenants� demands are influenced by factors such as location, size, layout, profile, use, state of repair and population growth. Try to get a modern or recently refurbished building with an efficient use of space. Tenants today are generally looking for medium/bigger floor spaces, particularly in the retail sector.

When purchasing a �sectioned� or tax break type property, find out what the �section� means from the local authority/tax office. Allowances offered in this area can vary from town to town. It is important to look at these aspects carefully. There is no point in paying a huge amount for a �sectioned property�, particularly in Dublin, if the allowances are actually more than you need by virtue of the definite price extra premium needed to acquire this type of property.

11. Examine the planning laws/Structure of the building
When buying a commercial property, research the planning trends in the area. Get professional advice on the structural aspects of the property by getting a survey of the building by an architect or engineer. Check with the local authorities to ensure planning permission and fire safety requirements are in order.

Planning permission for certain types of outlets is difficult to achieve in high street locations. Some premises, like fast food outlets, are now very difficult from a planning permission perspective. Conversely a small run-down existing takeaway might be a very good value purchase in years to come if permission exists there or is obtainable for the property.

12. Identify tenants� expectations
Commercial property has a lot of advantages over residential property when it comes to the quality of tenants, but it is important to establish their expectations to realise these. While commercial tenancies, under their lease, usually pay for insurance and external and internal repairs, check that this is what is in the lease. Are you as a landlord expected to contribute to the fit-out? (not usually the case in retail, but it�s very likely in some new office situations), or are they looking for a rent-free period while these fit outs are carried out? What about local car parking availability?

13. Study the landlord and tenant issues
If purchasing a property with existing tenants in it, check if they, or their predecessor in title, have Landlord and Tenant renewal rights. For instance, if a tenant or predecessor has been in occupation for 5 years or more there are often additional obligations that have to be met by the landlord, including the tenants right to lease renewal.

14. Exploit any hidden value
Is there hidden value that can be released? Can some of the assets be divested? Can a pub license be sold and the property turned into a restaurant or shop for instance? Can improvements be made or land subdivided? Or maybe there are pending planning permissions in place for new developments that would increase footfall in a run-down area.

15. Syndicates can be good, but consider the implications
Think very carefully about whom you consider purchasing with. Consider the implications of joining with family or close friends and deal only with people who are contributing a reasonable amount of equity.

It�s also important to think about what happens once you�ve purchased the property. Who will be responsible for the day-to-day property management issues and how will they be reimbursed for their workload? You should utilise a professional management company to ensure that the burden does not rest unfairly on one person (expect to pay about 5% of the rental income received, plus an agreed sum for handling the rent reviews, when they are due).

You should also have a clear agreement on how you will deal with the eventuality of one or more persons wanting to exit the syndicate group, with a properly documented agreement drawn up legally.

16. Talk to an expert
Listen to the professional advise offered by your local Real Estate Alliance agent. Why? Because at Real Estate Alliance you�ll find professional, well-qualified staff who are experts in the area so you can be confident you�ll get expert, unbiased advise. Real Estate Alliance has 46 offices nationwide and thousands of staff with their ear to the ground on your behalf.

- ENDS -

For further details please contact Emma Kelly/Gareth Murphy, Elevate PR on (01) 662 6562 or email gareth@elevate.ie or eimer@realestatealliance.ie on 086 8249040

NOTE TO EDITORS

Real Estate Alliance is a strategic marketing alliance comprising some of the country�s best-established auctioneers and estate agents. Our key focus is on locally-owned and established estate agents. With one quarter of the alliance�s firms in business for more than a century, and with an existing IAVI president & five IAVI past presidents among the group�s members, the alliance is characterised by the established strength of its membership. In addition, membership is only open to firms led by members of the Irish Auctioneers & Valuers Institute or the Society of Chartered Surveyors.

Clients of REA members benefit from:

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