With commercial property enjoying a positive outlook for 2017 and buy-to-let landlords increasingly put off by costly tax changes, it appears that many landlords are making the switch to commercial property. However, experts warn that they may not be properly prepared for the different challenges they will face.
Converting to commercial
According to auction house Allsop, there are now three times more the number of buy-to-let converts moving into the commercial property market than before the government's tax changes on rented accommodation. The auctioneers have seen small office buildings and shops proving most popular with those shifting over from the buy-to-let arena – a finding that may come as a surprise to more seasoned commercial landlords, since industrial and warehouse units continue to outperform both retail and office spaces.
Need for preparation
The fact that this is a currently unfavoured areas of commercial property is not the only risk factor to bear in mind for residential landlords switching specialism. Commenting on the rising phenomenon, Rufus Ballaster and Chris Picardoof City law firm Carter Lemon Camerons LLP say that it is "eminently sensible" for buy-to-let investors to consider commercial property – but that they must be aware of the "completely different legal principles" they’ll face.
These legal principles relate to a number of important areas, including mortgages, insurance, rent review, service charges and tenure security. Getting these matters right will be vital not only for investors hoping for a comfortable and successful transition, but for the reputation of the commercial property sector as a whole.
Another issue that experts predict transitioning landlords may face is a lack of owner-occupier demand that can fill income gaps if rental demand declines. This means cashflow considerations become even more important.
Landlords must also consider that they’ll be dealing with businesses where invoicing for and claiming rent not only happens differently, but is also subject to separate rules and regulations. In this environment, personal relationships and good communication remain important, but new commercial landlords need also to prepare for more difficult situations. That means ensuring there are systems in place to charge for late payments and begin enforcement action if necessary.
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