How to invest in commercial property

In a stocks and shares ISA or a Self Invested Personal Pension (SIPP) most investors stick to traditional equity investments. But fortunately the range of investments that can be held in an ISA or SIPP is growing all the time and it has never been easier to build your own diversified portfolio.

The surge in the prices of residential property over the last few years has prompted an increasing number of people to look at commercial property as an investment.

Buying commercial property to let out to tenants has the advantage compared to letting residential property in that commercial leases tend to be much longer than residential leases. Commercial property also offers two financial attractions: a good yield, and the possibility of capital growth over the longer term.

The downside to investing in commercial property is that investing in a single property carries considerable financial risk in the event of being unable to find a tenant for the property or having to accept a lower rental income. This risk may be particularly acute if there is a downturn in the economy and large numbers of vacant properties become available. There is also the danger of oversupply (e.g. large numbers of office units becoming available in a certain area).

For business owners who own their own business it sometimes makes good financial sense to place a commercial property in a Self Invested Personal Pension (SIPP). Only some SIPP providers offer this facility. It is usually tax advantageous to do so (but consult a financial advisor before taking such action!)

Investing in a property unit trust or fund can reduce this risk as the investment will be spread across a number of properties. An alternative is to invest in the shares of companies who themselves have exposure to the commercial property industry.

There are a range of commercial property unit trusts suitable for inclusion in a ISA or SIPP. Most ISA and SIPP providers provide access to a range of commercial property unit trusts. When selecting commercial property unit trusts for inclusion in my portfolio I look for a unit trust with a good range of properties in quality areas. I also look for a good dividend yield. My favourite commercial property funds include the Aviva Property Investment Fund. This fund has a good selection of properties in desirable locations, and the fund has a fairly high yield (dividends are paid quarterly). The Ignis UK property fund also has a good range of properties, and a monthly yield.

When buying a commercial property unit trust care should be taken to ensure that the big/ask spread between the buying and selling price isn't excessive. This can make it expensive to sell units after purchasing them.

Commercial property unit trusts can also be fairly illiquid. If the price of commercial property falls or investors get spooked then there is often a rush for the exits. This sometimes results in fund managers suspending sales of units of the fund in order to prevent fire-sales of the underlying property assets.

Taking a long term view on commercial property investments can overcome this lack of liquidity. It's also good to ensure that a portfolio isn't overexposed to a sector such as commercial property.

To get round these problems, it is also possible to invest in commercial property related Exchange Traded Funds (ETFs). These include the iShares UK commercial property ETF (stock symbol IUKP) and the iShares European Property ETF (IPRP).

All information on this hub is provided for information only and should not be used as a basis for financial planning. The information does not constitute regulated financial advice. Before investing you are advised to seek independent advice, such as by consulting an independent financial adviser.