Just like the residential market, there are times when a commercial property in disrepair comes onto the market; and, just as with distressed homes, commercial properties can present a lucrative ‘fixer-upper’ opportunity.
There are many things to consider when thinking about investing in commercial property, and these factors are amplified when attempting to turn a profit on a premise in a state of disrepair; is it structurally sound? Is it in a good location? Are there any security systems in place? Will there be enough budget left for optimizing security through tech convergence?
1. Establishing a Game Plan
Other than for your own professional use , there are three main reasons for investing in commercial property;
- to lease it and collect rent;
- to develop or otherwise change it and sell it on, or;
- to immediately sell it on (otherwise known as property arbitrage)
Carving out a clear game plan is critical to the success of any commercial investment, but even more so when dealing with one that needs to be repaired, renovated or otherwise improved.
Before signing on the dotted line, key considerations that must be made include:
2. Does the ‘Use Class’ of the Building Need to be Changed?
The term ‘Use Class’ refers to the legal definition and permitted use of a commercial property. Commercial buildings typically fall into one of the following use classes:
- A1 – A5: retail shops, restaurants, cafés and takeaways, professional and financial services, and drinking establishments.
- B1, B2, and B8: light industrial, office premises, storage, and distribution business.
- C1: hotels.
- Sui Generis (‘class of their own’): casinos, betting shops and arcades, launderettes, agricultural buildings
The Use Class of a building can be changed, the scope of which will be included in the accompanying Permitted Development Rights (PDRs). In some cases, the Use Class of a commercial building can be changed without the need for subsequent planning permission.
If you are looking to buy a rundown business that is running at a loss, you may only need to fit the property out with new appliances or other technologies, give it a cosmetic face-lift and secure new tenants in the same industry.
In the event that you wish to alter the property’s Use Class for greater perceived profits, it’s vital that you consider whether the change will require any prior approval. Many Use Class changes are permitted under existing PDRs, but it’s essential to confirm your options beforehand. The requirement for prior approvals typically centers around any related transport, contamination, and other safety risks, significant changes to the external appearance of the building, and whether the impact on the local area and economy is enough to warrant further investigation.
3. Comprehensive Property Research
When it comes to an investment as substantial as a commercial property, there’s no such thing as knowing too much about the property and its surroundings.
For starters, the more you understand about the building, the clearer you are regarding what you can and can’t do to it – both from a physical/structural and development perspective.
Planning rules can vary significantly between regions/local authorities, and legislation is always being updated or changed, so it’s never a good idea to assume anything. It is prudent to work with a Chartered Surveyor, as they know the local area well, and are familiar with local/regional and national planning authority rules and policies; this makes them particularly useful when considering what the most profitable options for a particular building may be, and just how doable they are under the regulations you will have to adhere to.
Either way, you must double-check the current legislations pursuant to the building to avoid wasting a lot of time and money. For example, PDRs used to cover changes from light industrial premises (B1) into residential units (C3), but this ended in 2020, leaving anyone who hadn’t done their due diligence with an industrial premise that they can no longer turn into residential units and a big rethink on their hands – not to mention wasted time and funds.
Certain properties can also be restricted from Use Class changes or other development due to being listed buildings, or located within National Park grounds – you simply must do your homework.
4. Learn the Area
As well as gaining a deep understanding of all aspects of the building itself, learning about the area it sits in is just as vital. Some local authorities are very encouraging of growth and change and encourage investors and developers to buy into the area and add to its evolution. Others, however, are not so visionary, and it can be near-on impossible to convince a council that is resistant to change that your development plans are a sound investment into the area at large.
Many councils have been criticized in recent years for giving the green light to far too many commercial developments that have resulted in low quality residential housing and inadequate building regulation adherence. Because of this, it’s better to expect a resistant local council and be pleasantly surprised, than to assume all will be well, only to be met with countless roadblocks to your development plans.
Again, this is where a Chartered Surveyor can help, as they’ll have plenty of first-hand experience with the local council and how they operate, as well as other area development insights that could impact the profitability of your plans.
5. Carrying Out the Renovations Yourself
As with any fixer-upper project, the key to optimizing profits is to keep the renovation costs down and move quickly without compromising on quality.
For this reason, many investors do try to carry out as much of the work themselves as possible, and at the very least, self-manage the project to avoid contractor delays.
Of course, as long as the property is vacant, there is no income coming in to fund the work, so it must run as smoothly as possible. Careful consideration must be given to:
- Budgeting carefully to include all aspects of the renovation process, including provisions for unexpected hurdles (delays in planning permission, having to rethink any aspects due to an oversight in design or the unavailability of certain materials).
- Ensuring that a sufficient budget allowance is made for cleaning contractors, both prior to renovations and once the work is completed – builders do clean up after themselves, but rarely to an usable degree for incoming tenants.
- Accurate projections regarding the time frame for each contractor (plumbing, electrical, etc.) and plotting a realistic project management plan.
- Does the building’s design allow for easy maintenance? (ex. location of the building, how the maintenance spaces are structured, etc).
- Ensuring that there is sufficient infrastructure and funds to install a future-proofed, business security system to attract and retain quality tenants.
Commercial buildings tend to appreciate far more slowly than their residential counterparts, so it is imperative that the renovation stage of your project runs as smoothly and efficiently as possible; planning and preparation is everything.
6. Network with Buyers
If you have a commercial property in mind for flipping (renovating and quickly on selling a property), the time to begin networking for potential buyers is yesterday.
Any improvements you make to the premise (such as new fit outs, upgraded security systems, lightning-speed wireless broadband) will be just as attractive to buyers as to tenants.
It may even be possible to sell the property before completion of your renovations, but at the least, you want to be networking and getting the word out long before completion to stand the best chance of finding the right buyers quickly.
Buying a distressed commercial property is a huge undertaking. Still, as with residential fixer-uppers, a successful outcome is all in the planning. Leave no stone unturned, plan and plan some more; by managing uncertainties and mitigating risks, you stand the best chance of success.