How to invest in commercial property without buying a whole building

Why most people never buy a building outright

A let commercial building in a decent town centre rarely sells for less than £1 million, and a good one in a city centre will often be several million. On top of the price come stamp duty land tax, legal fees, a survey and, once you own it, the work of looking after the building and the tenant.

Money is only half of the problem. The other half is concentration. Put £2 million into one building and you have one tenant, one lease and one location. If that tenant stops paying, so does your income. Institutions deal with this by owning dozens of buildings. Most private investors cannot, which is why the routes below exist.

We have been buying commercial property in York and across the North since the early 1980s, and for most of that time the way our clients have taken part is through syndication: a group of investors jointly owning one building. That is one of the five routes, and we will describe it as evenly as the others.

The five routes

Listed property companies and REITs. You buy shares through an ordinary stockbroking account. It is quick, cheap and there is no minimum to speak of. What you own is a share in a company, so the price moves with the stock market as much as with the buildings underneath, and most listed property companies carry a fair amount of debt.

Property funds and unit trusts. You buy units in a pool run by a professional manager. You get a spread of assets and someone else does the work. The two well-known drawbacks are that fees add up over the years, and that open-ended property funds have several times had to stop investors withdrawing money, because buildings cannot be sold as fast as unitholders sometimes want out.

Property syndicates. A group of investors jointly buys a specific building. Each person holds a defined share and receives that share of the rent. You know exactly which building you own part of, and you decide whether to take part in each one, based on the tenant, the location, the lease and the price. The trade-off is that there is no ready market for your share, so selling depends on finding a buyer.

Fractional and crowdfunding platforms. Online platforms split individual properties into small slices, sometimes from a few hundred pounds. The low entry point is attractive. The quality of the due diligence varies a great deal from one platform to another, exits are often slower than the marketing suggests, and several UK platforms have failed.

Joint ventures. A private arrangement between a handful of people who usually already know each other. It gives you the most control, but it needs capital, proper legal work and a good deal of trust.

Comparing the routes

What do you actually own?

These routes are often described as if they were variations on a theme. They are not. The legal substance is different in each case, and the difference matters most when something goes wrong.

If you own shares in a REIT you are a shareholder in a company, and if that company fails you stand behind its lenders and creditors. If you own units in a fund you are relying on the manager's decisions and on the behaviour of the other unitholders; if enough of them want out at once, the fund can close the doors for a while. If you own a share in a syndicate you hold an interest in one identified building, and your position depends on what the syndicate documents say.

Whichever route you look at, the questions are the same. What is my legal interest? Who stands ahead of me? What has to happen for me to get my money back?

Does the structure borrow?

Most property investment involves borrowing, and borrowing works in both directions. When values are rising it adds to your return. When they are falling it adds to your loss, and it brings two risks of its own.

The first is refinancing. Loans come to an end and have to be repaid or replaced, and if credit has tightened in the meantime the new terms may be worse, or there may be no lender at all. The second is ranking. Interest is paid before anything reaches investors, and if a loan covenant is breached the lender can force a sale at exactly the wrong moment.

A structure with no borrowing avoids both. Our own syndicates have always bought with cash for this reason. That does not make them low risk; the tenant can still fail, the value can still fall and the share can still be hard to sell. It does remove the one mechanism that most often turns a bad year into a permanent loss.

Who is allowed to invest?

REITs and authorised funds are open to anyone. Syndicates and most private property investments are not. In the UK they are usually unregulated collective investment schemes, which can only be promoted to professional clients, certified high net worth individuals and certified sophisticated investors.

There is a good reason for that. These investments are hard to sell, they are not covered by the Financial Services Compensation Scheme, there is no recourse to the Financial Ombudsman Service, and you can lose the capital you put in.

Which route suits which investor?

If you want to be able to sell tomorrow and have no involvement, a listed vehicle does that. If you want a professionally managed spread of assets and can live with the fees and the occasional gating, a fund does that. If you want to know precisely which building your money is in, choose it yourself and leave the capital there for years, syndication does that, provided you qualify.

Nobody should decide on structure alone. Take independent financial advice before committing to any of them.