A Guide to Purchasing Freehold Commercial Property in London

31st October 2019

If you are considering investing in commercial premises, your two main options are either to purchase the freehold of a property or take on a lease. In other words, to buy, or to rent.

There are advantages and disadvantages of both options and the optimum choice will rest upon your specific circumstances and your goals going forward.
There are advantages and disadvantages of both options and the optimum choice will rest upon your specific circumstances and your goals going forward. There are advantages and disadvantages of both options and the optimum choice will rest upon your specific circumstances and your goals going forward.

Let’s take a look at what to consider when purchasing freehold commercial property and explore the pros and cons of renting versus buying business premises in the Capital.

What to consider when buying freehold commercial property London?

When you buy a freehold, it means you own not only the property, but also the land it stands on. You will be fully responsible for the maintenance of the building and the land that you own, and any costs associated with it. You will therefore need to consider those costs and ensure you run sufficient forecasts to check that you will be able to cover them.

Make sure you have sufficient funds for the larger capital outlay required at the outset, and that you can meet any future finance repayments and interest.

Also consider that if you are purchasing for your own business use and you outgrow the premises in the future, you will face the prospect of sourcing alternative premises – going through the sale and purchase process and possibly relocating your business. This is different in the case of taking a lease, wherein there is nothing to sell, relocating is more straightforward. To make the process more efficient, it’s worth counting on investing in agency services.

If you are renting out your freehold commercial premises, you will need to bear in mind that managing tenants carries costs, and that there may be vacant periods with no rental income, during which time you will continue to be responsible for business rates and finance repayments and interest. To ease the management work, you can hire professional property services

Very careful consideration of budgets and your long-term business strategy as well as all of your responsibilities are essential before you make the decision to purchase a freehold.

Freehold, or share of freehold?

With freehold property acquisitions it is important to be clear on whether you are buying outright or purchasing a share of the freehold.

Properties that are sold with a share of the freehold tend to be those which share a single plot, perhaps a single building converted into individual offices. Because the properties share the same land, roof and external walls, responsibility has to be taken for their maintenance and repair. This will be the freeholder’s responsibility, so with more than one business in the building, it makes sense to share that responsibility as well as share control a bit more fairly.

If you buy a share in a freehold, you will be required to take care of the maintenance of the building alongside the other freeholders. One freeholder is usually appointed as an overseer, or the job is given to a managing agent. You will therefore need to consider whether this kind of set-up suits you and gives you the control you desire.

What to think about if purchasing a commercial freehold property as an investment?

If you are purchasing a commercial freehold for investment purposes, either to sell on, or on a buy to let basis, there are various factors to bear in mind.

The grade of the building is one of these factors. Commercial buildings are classified from A to C depending on their age, condition, desirability, amenities and location. Grade A buildings are at the top of the scale and are usually new or well-renovated properties in prime locations.

For the buy to let investor

the rental rates for a Grade A property will be significantly higher than those for a Grade B or C property, although of course the purchase price will reflect these rates. However, for the experienced developer, the purchase of a lower grade building with a view to refurbishment and upgrading to a higher classification could well return a healthy yield.

For the investor intending to sell on

upgrading a property from B to A or from C to B through refurbishment could potentially deliver a decent return. It is also worth noting though that a Grade B property will only make Grade A status if it is well located, not too old and offers a good selection of amenities.

If you are purchasing a freehold commercial property that is already tenanted

then you will need to undertake due diligence checks on the tenants or instruct an agency to. You will want to satisfy yourself that the tenants are not in breach of their lease agreement and that there are no rent arrears. You’ll also need to familiarise yourself with when the next rent reviews are due, and what your obligations are as a landlord under the lease.

What are the benefits of buying freehold business premises in London?

As a freehold owner, you will enjoy a great deal more flexibility than if you were a leaseholder. You will be able to deal with the property as you wish and maintain it in a state of repair that suits you. So, if you wish to refurbish it to suit your individual needs then you may do so (within reason to any applicable regulatory permissions). 

If you plan to remain in the same location for a number of years, then it will usually be in your best interests to purchase a freehold building. This is because compared to renting over a long duration, the costs associated with freehold ownership tend to be lower.

Freehold Commercial Property – London Specialist Advice from Cattaneo Commercial

Cattaneo Commercial is a leading commercial property agency renowned for its expertise throughout the south west of London, North West Surrey and the south west M25 area.     

If you are considering purchasing freehold business premises in London, you are welcome to get in touch for fully personalised, specialist advice and guidance on your range of options.

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