INSIGHT: How to get started in commercial property investment

ABOUT THE EXPERT

Suzi Carter is a Chartered Surveyor and has worked in the property sector for 25 years. That includes over 10 years at Director level at industry giants LandSec plc, Kingfisher Group and CBRE. Most of her professional career has involved acquiring, developing or asset managing commercial property and she has been responsible for portfolios worth over £2.5 billion. Visit suzicarter.com

Commercial property is a key element of the portfolios of many established long-term property investors in the UK. It offers a potentially lucrative way to move up the value chain. Suzi Carter, a stalwart of the strategy tells Julian Pletts exactly how to get started.

When you enter the property investment field a dizzying array of decisions await. But you start to do your research, cut through some of the noise and strategies become clearer. Opportunities start to present themselves, with some effort, of course. For many the humble but tried and tested buy to let is the way forward, after all, people will always need somewhere to live. And that is absolutely fine; as YouTuber Jamie York, says sometimes there is nothing more attractive than a ‘boring, vanilla, buy to let’. However, if you want to scale up to bigger deals commercial property offers an opportunity to move up the value chain if you are prepared to put in the time and effort to do your research, build connections and develop your investor skillset.

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Suzi Carter, is a chartered surveyor who had been in the property industry for more than two decades and believes there are fantastic opportunities in the pipeline for those willing to put in the work to highlight them and hunt them down.

BACK TO BASICS

You may consider yourself a residential property powerhouse, but before you dive into commercial property it is best to go back to basics. And the most basic question – what is commercial property?

“So commercial property is any type of property, or most types of property - there are always exceptions to every rule, where a business occupies it,” says Carter. “As opposed to somewhere where it’s a home, it is where a business is based.” “So obviously, that very definition can include a huge range of property. Now, in more recent years, it can be slightly more widely defined as something that’s valued using a commercial valuation. So, things like build-to-rent are commercial - a multiplier of the rent is how you value it - and student accommodation is the same, but it’s generally where a business occupies it.”

Carter notes there are many ‘push and pull’ factors to commercial property. One big pull is the ability to find a competitive niche. “Commercial property has got loads of profitable niches that the masses don’t really know about, so there’s definitely potential to enter markets where you are not in as much competition and where if you know what you’re doing there’s a possibility to enjoy a competitive advantage… You can also have a genuinely handsoff income,” adds Carter, singing the praises of fully repairing and insuring leases. “Then in terms of the push factors there’s more and more regulation and tax on the residential sector and diversification of portfolios is a really good thing.”

RISE TO THE CHALLENGE?

There are some challenges though to starting out in commercial property. Firstly, the level of complexity can be greater than investors have previously experienced, particularly if they are used to traditional buy to let. “I think there’s a basic understanding piece. It operates as a market very differently than the residential market. So for instance, commercial leases are a different beast to assured shorthold tenancies.”

The size of potential deals can be an eye-opener for some investors and to really succeed in commercial investment you might need to get used to some larger numbers, although deals are available at all scales.

“A lot of people are intimidated by some of the pricing in commercial when they first go into it. I think there’s quite an easy answer to that one, which is really that you can pay as little or as much as you want. I wouldn’t say that many of us are in the territory where we’re buying a £100 million+ assets, but you know, you can buy assets for a quarter of a million.”

STRATEGIC THINKING

If that hasn’t put you off there are many niches within commercial property which offer savvy investors great opportunities.

“Commercial to residential conversions are a really great strategy where you take a shop or a class E property and you do some form of conversion, whether that’s to the upper parts or the whole property, into resi. Now, obviously, in the current market, you’ll just need to make sure that you model a rental exit as well as sale just to make sure that you’re covering all bases.”

“I also really like industrial, it is a growth sector,” explains Carter. “I don’t think local councils have really put enough industrial [provisions] in any of their local plans and industrial is always competing with residential developments. So, I don’t think that there will be that much more industrial built, and yet industrial ticks a lot of global trends with the rise of online shopping, logistics and SME businesses liking to locate in industrial sites. It attracts so many different types of operators.”

It is worth noting new commercial property investors need to go into the current market with their eyes wide open, not least because, just like the residential market, finance is going to be a challenge.

“The commercial finance market is more stringent and it definitely contracted during Covid and hasn’t really freed itself up again,” she notes, saying there are still plenty of creative ways to finance deals for committed deal-makers.

BE COMMERCIALLY PLIABLE

So, where to start and what skills do you need to work on in order to excel in the commercial property field? One important first step with any investing as well as working on mindset and goal setting, is considering what financial means you have available to you.

“You need to assess your accessibility to cash for sure, in terms of equity and debt - what’s available to you,” she says. As already said, commercial property offers an seemingly endless array of avenues to go down and the opportunity to develop a specific competitive advantage. Carter suggests you consider this from the outset of your commercial property investing journey.

“It’s about going an inch wide and a mile deep… and becoming specialists in the area so you get a competitive advantage.

“Get to know the agents in that particular sector really well so that you know they know you specialise in that area, strategy or type of property and therefore, you know, they’ll funnel potential property through to you.” A great place to start when considering your ‘micro-niching’ strategy is a free webinar that Carter offers at her website. It is particularly powerful if you can dovetail your niche with an emerging trend in the market.

“It’s actually about not investing by accident, it’s looking at where you can hit the trend. So, you know, when people were investing in logistics maybe 10 years ago, there was a lot of foresight there in terms of online retail was going to grow that sector.”

MAKE THE TEAM

Some buy to let investors who have built their portfolio may be used to being a Jack of all trades from deal sourcer, all the way through to managing agent. This is not going to be possible in the commercial world. Therefore, when you have done your research and found a niche to concentrate on that hopefully dove tails with an established or emerging trend, you need to start building a team.

“You need a really good broker - somebody that absolutely understands the commercial market and has good access to commercial lenders,” says Carter. “I always say to my mentees, whenever you have a deal, run it past your broker first just to see how you would get it financed. There’s no point in going any further if you can’t get it financed or you’re going to need to look at alternative financing, like investment partners.” “You also need a really good commercial lawyer, again, a specialist in the commercial space, somebody who understands commercial leases,” says Carter.

“Then a commercial agent is absolutely key because they can help you on so many fronts, they can get a commercial valuer to go in and value different asset management scenarios for you, which obviously gives you a really good idea as to how the deal stacks. “They can source product for you, help you with leases, negotiate with tenants.” If your strategy or deals require you to carry out works then you would need to find a build team and architect with expertise in commercial property, though some attractive deals require very little physical work says Carter and can just be a ‘paper exercise’ of attracting and putting in a new tenant. Team building will be a non-starter though if you are not able to establish credibility, particularly with agents.

“Be quite clear in your mind what you want to invest in and what kind of price bracket you’re looking at before you start talking to the commercial agents,” advises Carter. “Credibility is absolutely key. You’ve only get one shot at that. Have conversations in terms of ‘this is my strategy, this is where I want to invest, this is a kind of price bracket I am looking for. Is that something you can help me with? How’s the market in this area?”

SKILLS TO PAY THE CONTRACTOR BILLS

As well as assembling a team, honing a certain few skills will prepare you for your commercial investing venture.

First of those is discipline.

“I think [you need] discipline to follow a strategy or niche and not diversifying too wildly. You definitely need the ability to stack deals and model multiple exits. Relationship building is absolutely key, as in all types of property investment.”

Good commercial property investment takes a willingness to do the research and consult the right experts.

“There will always be a need for houses. Everybody will need a place to live,” compares Carter. “But there will not always be a need for some types of commercial property. And we’ve seen that through Covid when suddenly we saw high street shops falling by the wayside. We saw tenant failures and so the ability to cut through all the noise and understand the trends will definitely give you the edge.”

Keep that edge razor-sharp right now by trying to find recession-proof businesses. “If you can invest in recession-proof tenants at the moment, it’s definitely the place to be,” explains Carter. “Health is a really good example of that, for instance, dentists, chiropractors, physios. I don’t know about you, but when I’ve got a bad back, I would pay any amount of money to go to a chiropractor, cost of living crisis or not!”

“When you are looking at the tenant you just need to do a sense check as to whether their business is going to be affected by consumer downturn,” says Carter, adding with a smile that people still go to Nando’s in a recession!

TOP THREE TIPS

To finish we asked Carter to give us her top three tips for surviving and thriving in today’s commercial market.

Firstly, it’s all about liquidity: “Get into cash. That will boost your credibility for purchases. It’ll enable you to get the deals others won’t be able to, and it’ll definitely be the number one way to move forward.”

“Number two is definitely niche. We want to be looking at those sectors that are going to recover the quickest.”

“The third one is nurture relationships. Now is a great time to be nurturing relationships with agents, building your credibility with them,” she says, as well as returning to vendors as they get more motivated.

Finally, Carter sounded a note of pragmatism to tie off her advice. “There’s no rush. I feel like a lot of investors are in a rush a lot of the time. I don’t usually say stop, but I’m also waiting and watching the market and just seeing where things go, where the opportunities lie and where some of the balls land. “If a deal stacks and you’ve done sensitivities on maybe a 10%, 20%, 25%, whatever, market drop and your asset management still works, then go for it. Absolutely.”