Commercial property — offices, shops, warehouses, industrial units and mixed-use buildings — is let to businesses rather than individuals. Leases are longer, tenants often cover repairs and insurance, and the asset is valued primarily on its income and the strength of its tenant. It plays by a different rulebook to residential, with lower entry Stamp Duty but higher void risk. This is the full process.
Step 1 — Understand how commercial differs from residential
- Longer leases: often 5–15+ years, giving stable long-term income.
- FRI leases: under a Full Repairing and Insuring lease the tenant pays for repairs and insurance, reducing your running costs.
- Valued on yield: value = net income ÷ market yield, so income and tenant quality drive price directly.
- Higher void risk: an empty commercial unit can stay empty for a long time, and you pay the business rates while vacant.
- Cheaper to buy tax-wise: commercial uses the non-residential SDLT scale with no 3% surcharge.
Step 2 — Choose a sector and strategy
Decide which sector fits your risk appetite and capital: industrial/warehousing (currently strong demand), offices (more volatile), retail (location-critical), or mixed-use. Decide whether you want a secure long-let asset with a strong tenant (lower yield, lower risk) or an asset-management play — vacant or short-lease property you can add value to by re-letting, refurbishing or changing use (higher yield, higher risk, more work).
Step 3 — Assess the tenant and the lease (covenant strength)
In commercial, you are largely buying an income stream, so the tenant and lease are as important as the building. Assess the "covenant strength" (financial reliability of the tenant), the unexpired lease term (WAULT — weighted average unexpired lease term), rent review terms, break clauses, repairing obligations and any tenant rights to renew. A strong tenant on a long FRI lease is a very different asset to a weak tenant with an imminent break clause.
Income security is the asset
A commercial building is worth what its income is worth. A blue-chip tenant on 12 years unexpired commands a premium; a struggling tenant with a break clause next year is a risk you must price for. Analyse the lease as hard as the bricks.
Because commercial value is literally income ÷ yield, growing the rent grows the capital value at a multiple. In this example a £5,000 rent increase at an 8% market yield adds £62,500 of value — that leverage is the whole point of active commercial investing.
Worked example — how income drives value
A small rent rise, a large value uplift
Step 4 — Arrange commercial finance
Commercial mortgages are relationship-driven and assessed case by case: lenders look at the tenant, lease, property and your experience. Expect lower loan-to-value (often 60%–75%), higher rates than residential, and personal guarantees. Many investors use a commercial finance broker. Interest is fully deductible against commercial rental profit (Section 24 does not apply here).
Step 5 — Source and appraise the deal
Find stock via commercial agents, auctions and off-market. Appraise on net initial yield (net income ÷ price), the security and length of income, the reversionary potential (can the rent rise at review or on re-letting?), void and rates liability if empty, and any capital works needed. Model realistic void periods — this is the biggest commercial risk.
Step 6 — Due diligence
- Building survey by a commercial surveyor — structure, condition, services, dilapidations.
- Legal: title, the actual lease(s), rent deposit deeds, any planning/use-class restrictions, and searches.
- Environmental checks (contamination is a real issue for industrial sites).
- The VAT position: is the property "opted to tax"? This affects VAT on the price and on future rent — see the commercial tax guide.
- Business rates liability and any reliefs.
Step 7 — Buy and complete
Offer based on yield and lease analysis, instruct commercial solicitors, satisfy the lender's conditions, then exchange and complete. Your solicitor handles the non-residential SDLT and any VAT/TOGC treatment (a tenanted property sold as a going concern can avoid VAT). You take over the existing lease(s) and become the landlord.
Step 8 — Manage the asset and the lease
Commercial management is lighter day-to-day on an FRI lease (the tenant maintains and insures), but the lease events are what matter: rent reviews, lease renewals, break clauses, service charge administration for multi-let buildings, and enforcing repairing obligations (dilapidations). A managing agent or commercial property manager handles service charges, rates and lease events for multi-let assets.
Step 9 — Add value, review and exit
Grow value by improving the income: re-gearing leases to longer terms, achieving rent reviews, letting vacant space, refurbishing, or changing use (e.g. offices to residential under permitted development, or to industrial). Because value tracks income, a small rent uplift can create a large capital gain at the prevailing yield. On exit you sell the income-producing asset (often to another investor or a fund), mindful of the CGT or Corporation Tax position depending on how you hold it.
Commercial mistakes that cost the most
- Underpricing void risk — an empty commercial unit can sit vacant for a year while you pay the business rates on it.
- Buying weak covenant strength: a tenant that fails leaves you with no income and a hard-to-let building.
- Ignoring an imminent break clause or short WAULT, then losing the tenant right after purchase.
- Missing the VAT position (is it "opted to tax"?), which can add 20% to the price or the rent unexpectedly.
- Overlooking dilapidations and repairing obligations, or contamination on industrial sites.