Buying a Commercial Property: What You Should Know

Buying a commercial property can expand your business’s capacity, increase its value, and provide a valuable investment for the future. However, purchasing commercial property differs from residential property in several ways.

The UK’s commercial property market is currently worth an estimated £900 billion, making it one of the most lucrative markets worldwide. If your business needs room to grow, purchasing can be a profitable strategic move.

In this guide, we discuss the ins and outs of purchasing commercial property.

What is classified as a commercial property?

According to AXA Insurance, the definition of a commercial property is as simple as a building used solely for business purposes. This includes:

·  Offices

·  Restaurants

·  Shops

·  Medical centres

·  Shopping centres

·  Gyms

Finding a commercial opportunity with a business broker

Many businesses outsource commercial property sourcing to business brokers like Hilton Smythe. But what can business brokers do for you?

• Search for premises matching your needs on your behalf.
• Tailored advice on different commercial opportunities.
• Support throughout the acquisition process.

Leveraging independent, objective advice prevents businesses from making costly missteps that leave them with an asset that doesn’t meet their expectations.

The funding options for buying commercial property

Several funding options are available for firms looking to purchase commercial property. Despite recent economic turbulence, lending is expected to increase by 32% by 2028, indicating massive potential in this sector.

Few businesses pay cash upfront, meaning they tend to explore financing options. Here’s a rundown of the most common funding options (and when to use them).

Commercial mortgage

Commercial mortgages are by far the most used funding options. They function like residential mortgages, with businesses making regular monthly repayments until their loans are paid off.

These are the easiest loans to understand, making them the most straightforward financing option.

Bridging finance

Bridging finance is short-term loans businesses use to achieve a quick sale before switching to a long-term solution, such as a mortgage. This helps to secure the property if waiting for a previous property to sell.

These loans last a few weeks to up to 12 months to cover short-term funding gaps.

Asset-based lending

Asset-based lending is a loan secured by a form of collateral. Examples of assets companies may put up include:

Real estate

Inventory

Accounts receivable

Machinery

Asset-based lending is ideal if your business’s credit record isn’t great or you need financing quickly.

Sale and leaseback

Sale and leaseback is an agreement whereby you sell a commercial property you own, but the buyer leases it back to you. You lose ownership, but your tenancy is guaranteed. Companies use this to release funds.

Private equity

Alternatively, you may seek private investors to fund the purchase. Private equity financing requires giving up a portion of the equity, but it can be ideal if you cannot secure financing through conventional channels.

Obviously, the downside is that you’re at the mercy of your investors.

The process of buying a commercial property through a broker

What does a commercial property purchase look like when using a business broker?

It’s not dissimilar to purchasing a home or making a sale independently. Generally, you’ll follow these steps:

1. Initial Consultation – The first step is to discuss your needs with your broker, including your budget, timeline, why you want the property, and any specific requirements.

2. Research – Your broker will leverage their network to identify properties that are a potential match. They may already have public or private listings within their database immediately.

3. Tour – Like any other property purchase, you’ll inspect them personally so you can weigh up the pros and cons of each one.

4. Due Diligence – Brokers assist in the due diligence process, including dealing with financial documents, proof of ownership, and more. It’s typically faster because brokers with their own listings have often already completed many of these due diligence steps before listing.

5. Forcing the Sale – Your broker will assist with negotiations, contingencies, and other arrangements to ensure the buyer and seller are happy. Finally, they’ll provide full support throughout the closing process.

Many business brokers offer post-closing assistance. This may include help with leasing and property management.

What you should consider before buying a commercial property

Commercial property is substantially more expensive than residential property. Making the wrong buy can ruin your profitability for years to come. For example, did you know the average cost of commercial property in Greater London in 2023 was £1.6 million?

Before looking at properties, it’s critical to understand your needs and how acquiring a specific property will enable your business to grow.

So, what should you examine before buying a commercial property?

Location

Location is the number one consideration for any business premises. What makes a good location depends on the business.

For example, a retail store must consider public transport links and foot traffic. On the other hand, offices may prioritise accessibility and amenities like nearby bars and restaurants. Industrial units may need access to major motorways, whereas distribution hubs may focus on ports and airports.

Figure out what matters most to your business.

Financing arrangements

Determine your financing if you opt for property A vs. property B. One property may be more suitable but requires substantially more debt. This is where you must consider what your business can stand and potential worst-case scenarios.

Growth potential

Most managing directors inspect whether a property is suitable for them now. Few consider whether that property will be suitable in three, five, or ten years.

Ensure you’ve got room for expansion, such as if you need to hire more employees or develop new products. Most businesses eventually outgrow their existing premises, but if it happens a year from now, you don’t want to be locked into an expensive property purchase.

Another option includes exploring whether planning permission could make extensions viable.

Access

Who needs access to your property, and for what purpose?

Think heavy-goods vehicles, where your workers live, and whether you’ll need access to airports, ports, and other transportation infrastructure. If you regularly welcome clients to your premises, do you want a place that’s cheap but difficult to find?

Price

Finally, does the price make sense?

Finding the perfect property is great, but you’ve wasted your time if it’s out of your budget. Ensure you have a budget and define any wiggle room before looking at properties.

At Hilton Smythe, we specialise in supporting the UK’s business community through our commercial brokerage services. Gain access to a team of experts who understand the intricacies of sourcing suitable commercial property by speaking to the team now.