Commercial Property is an established and professionalised asset class with a strong rental yield and total return profile. It offers portfolio diversification, and has become an increasingly attractive option to investors looking for a growing income stream in today\u2019s low interest rate environment. However, as with any investment, there are risks to bear in mind.<\/p>\n
What are the key risks?<\/strong><\/p>\n Risk: Property selection<\/strong> \u2013 Inexperienced investors may not be aware of a property\u2019s limitations or potential risks to investment performance.<\/p>\n Why we\u2019re comfortable:<\/strong> Our Director of Commercial Property, Xavier Pullen, has more than 40-years of experience in acquiring institutional grade commercial properties, including a 35-year tenure at the LSE listed, Capital and Regional property company where he was a founding director. Read more about Xavier\u2019s experience here.<\/a><\/p>\n Xavier and his team will select and comprehensively appraise every property under consideration, supported by our team of analysts who, with access to leading industry intelligence, will assess the strength of the local market and the rental levels and letting track-record of nearby properties. Read more about our current commercial property acquisition strategy and property selection process here<\/a>.<\/p>\n Risk: A tenant cannot pay their rent <\/strong> Risk: Rental void periods<\/strong> Risk: The building falls into disrepair or requires substantial maintenance <\/strong> Risk: If a building becomes economically obsolete and cannot adapt to new requirements<\/strong> Market risks and how we mitigate them. <\/strong><\/p>\n Risk: Property prices fall due to an economic downturn<\/strong> and business contraction which increases default and reduces demand for commercial premises Risk: Interest rate increases,<\/strong> impacting the cost of servicing debt, reducing income available for distribution to investors on geared properties Read more about commercial property and investing with Property Partner here.<\/a>
\nWhy we\u2019re comfortable:<\/strong> We will select properties let to profitable businesses with a strong covenant. Our property assessment includes an analysis of the tenant business. Once a property is acquired, we will stay close to tenants and monitor trading so potential problems can be anticipated and mitigated. By acquiring a varied selection of assets, we intend to give investors the opportunity to build a diversified portfolio across tenant companies as well as commercial sectors.<\/p>\n
\nWhy we\u2019re comfortable:<\/strong> We will acquire properties with a long outstanding term remaining on the tenants\u2019 leases and will proactively seek to negotiate an extension as they approach the final 5 years. By staying close to tenants we will anticipate potential vacancies and manage them accordingly. Our assessment of a property will seek to establish that it will hold appeal to potential alternative tenants and\/or have a credible alternative use.<\/p>\n
\nWhy we\u2019re comfortable:<\/strong> Unlike with residential property investment, commercial property tenants are typically responsible for repairs and maintenance. The risk is mitigated with a full repairing and insuring lease (FRI) to a robust business.<\/p>\n
\nWhy we\u2019re comfortable:<\/strong> We will select simple properties with a relatively low build cost (such as warehouses and convenience stores) and look for opportunities with a potential alternative use, such as residential development. In addition, we will avoid offices which are more likely to become outdated from the tenant’s perspective as technology changes the way we work.<\/p>\n
\nWhy we\u2019re comfortable:<\/strong> We will focus on diversification and tenants with strong businesses across a wide range of sectors. Our strategy includes allocating capital to alternative sectors where the underlying drivers and market perception of their value, are not closely linked to the short term economic outlook, e.g. well located convenience stores, doctors\u2019 surgeries, other healthcare properties, nursery schools. We won\u2019t over-extend leverage, mitigating risk of foreclosure if values fall sharply.<\/p>\n
\nWhy we\u2019re comfortable:<\/strong> Interest rates are typically increased to control inflation. Given that Commercial property rents usually move in line with inflation, this provides an element of protection against rising interest rates. Furthermore, we will seek leases with contracted, upward only rent reviews. We will also ensure an initial income coverage ratio of at least 200%.<\/p>\n
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