Buying offices as an investment
6th January 2022 by Mark Preece
The best investment property will be one where the fundamentals are right. It should be in a suitable location, in sound structural condition, and ideally give you scope to upgrade and reconfigure the internal layout to appeal to a range of tenants.
‘When considering investing in office property, there are opportunities to add value where there is scope to improve,’ according to Mark Preece, head of the commercial property team with Laceys. ‘Many of us will be happy to return to a proper desk instead of perching on the kitchen table, but tenants may want something better than some of the rather tired traditional offices on the market.’
A good location will make your property much easier to let. It should be somewhere with enough transport links, ideally allowing for access by public transport as well as private vehicles. If you have space for EV charging, so much the better. Depending on the type of tenant you are hoping to attract, it may be helpful if your property is close to shops, restaurants, and cafes, and possibly amenities like childcare. The shift in working patterns following the pandemic may make ‘neighbourhood’ offices, outside traditional town or city centres, more attractive than they have been.
Access can be affected by legal issues, so it is important to get your solicitor to check that you and your tenants will have the necessary rights over any shared or private access roads. They will also be able to advise you about any restrictions on the types of business that can lawfully operate from the property and whether there are any limits on hours of use. Where there are restrictions like this, they could be in the planning permission for the building or in restrictive covenants set out in the title documents. If you are thinking of buying a long leasehold interest in the property you will be bound by all the obligations and restrictions in that lease, so it is crucial to get legal advice and understand your commitments.
Even if you are buying a modern building, you should get a survey to check the condition of the structure. As a landlord, you will be responsible for keeping any parts of the building not let to tenants in good repair. You should be able to recover ongoing repair costs from your tenants through the service charge, but probably not the cost of remedying underlying defects which could affect your investment return.
Letting the property
The main return on your investment will be rental income from tenants. If you are buying a building that is already let, you will have the advantage of an immediate income stream. On the other hand, you will be stuck with the terms of any existing leases, at least in the short term. You should ask your solicitor to review all leases and highlight any aspects that are unusual or that may affect your ability to upgrade or redevelop the property in the future.
Key things your solicitor will be looking for include:
- how long each lease has left to run;
- any break clauses, which give either the landlord or the tenant a right to end the lease early; and
- whether the tenants have 1954 Act security of tenure. If they do, it may be difficult to get vacant possession in the future, because protected business leases automatically continue unless they are brought to an end by a statutory process. The tenant will also have the right to apply for a new lease on broadly similar terms.
If your property is vacant, you have more flexibility to decide on how best to configure the units for letting, and to start with a lease on terms that you are happy with. From a practical perspective, you should consider whether the property is ready to let as it is. If it needs work, will it be cost-effective? Depending on what you want to do, you may need planning consent. If you are buying a leasehold interest, you must obtain consent from your landlord, and this is another area where you need legal advice. It is important to have your target tenants in mind when you are deciding on how to present the building. Tenants looking for a shorter-term commitment will want a clean, modern space which is ready for them to move in. In particular, they will expect to have broadband installed, so they can ‘plug and play’. Other tenants may be looking for a longer lease and may prefer to install their own fit-out. That may save you money on the finish, but you will be expected to allow the tenant a rent-free period to reflect the time they spend fitting out and you will want to approve whatever they intend to install.
Planning for the future
As with any long-term investment, you should have a strategy in mind for your property portfolio. You should plan for any anticipated changes in law that may require you to spend money upgrading. Energy performance is an obvious issue. At present, the property must have an EPC rating of at least E before you can lawfully let it and from 2023, that will apply to any leases already in place as well as new ones you grant. The Government is now committed to raising the minimum energy rating of B by 2030, although the details of how this will be enforced have not been finalised. For any investment purchase, you need advice on how easy it will be to improve the energy rating and how much that is likely to cost. You probably will not be able to recover the cost of this type of upgrade through service charges, but you may find that a building with better energy performance and green credentials will be easier to let and may command a higher rent.
More general issues to consider for the future of your investment property include:
- Internal layout: a flexible layout will mean you can adapt the building for different tenants. If it is not already flexible, can you create flexibility?
- Have any telecoms operators been given rights to put their equipment anywhere on the building? This used to be a valuable source of additional income, but this has significantly reduced as a result of changes in the law. It can be slow and difficult to get this sort of equipment removed if you want to redevelop and even if there is nothing like this on the building at present, operators have statutory rights to place and keep their equipment on suitable sites.
- Is there scope to adapt the current office use in the future to keep pace with the market? Recent planning policy has encouraged more flexibility, with a new use class E, which makes it easier to change between different business uses and even incorporate amenities like a health centre or nursery. If you want a full picture of how this might apply to your property, you should get specialist advice from a planning lawyer. If you are buying a leasehold interest, your scope to change use might be limited by the terms of the lease, so make sure you know what they are before you go ahead.
How we can help
If you are planning an investment purchase, your solicitor can work alongside you, to make sure you have all the information you need. Once you have chosen your property, we can guide you through the purchase process and then support you with advice on lettings and management, to help you enhance your returns and keep your costs under control. If you would like further advice please contact Mark Preece in confidence on 01202 377800 or email email@example.com
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.