Flipping property is a phrase we’ve become accustomed to in the residential property market, but can you flip commercial property?
Flipping, in a broad sense, is a method for turning a quick profit from buying and selling a property.
In residential property, the traditional flipping process is to purchase a property, perform renovations and upgrades and then remarket it for a quick sale, also known as a ‘fix-and-flip’.
In some situations, flippers can even resell the house between exchange and completion, usually when the house simply needs to be remarketed to a new buyer who is willing to pay more for it.
But what about flipping commercial property?
It is certainly possible, and some commercial property flipping strategies are already very popular throughout the UK.
To Flip or Not to Flip – That is the Question
There are three main ways to profit from typical commercial property investment:
- Method 1: Lease the property and collect rent from the tenants.
- Method 2: Develop/renovate/change the property and remarket it
- Method 3: Immediately sell the property to a new buyer without making any changes
Method 1 is a classic buy-to-let commercial property investment. Purchase the building, rent it out and collect rental payments from the tenants. Often, you won’t even need to touch the building itself.
Methods 2 and 3 are more akin to ‘flipping’ the commercial property, they involve making changes that unlock some form of short-term profitability.
To execute methods 2 and 3, you’d need to find a profit-making angle that is short and sharp, especially because securing finance would likely be costly without finding a tenant for the property prior to completion.
Most lenders prefer income-generating property and aren’t prepared to offer decent commercial mortgage rates without the security of tenants. Of course, this wouldn’t apply if you’re a cash buyer, but purchasing a commercial property with cash would rarely be economically viable for anything large and substantial.
However, for small commercial properties, e.g. shops and small offices, flipping commercial property purchased with cash is certainly viable, potentially straightforward and lucrative if you can find a strong bet.
Another option here would be a bridging loan that secures short-term finance for the property whilst it’s unoccupied. During this period, the property could be renovated or fit-out for new buyers.
It might take very little work to make a commercial building a much more attractive proposition to tenants.
That said, this is still a high-risk approach as there’s no ultimate guarantee that you’ll find tenants and the property itself acts as security on the loan.
This would usually be considered a risky strategy unless you’re sure you can attract tenants quickly – and you’d have to convince the lender of this to secure a reasonable rate unless you’re putting up a large percentage of the cash yourself.
Some new commercial mortgage products are designed for investors who can cover mortgage payments from their other personal or business income streams and offer significantly better rates than bridging loans.
This gives the investor time to renovate the building and find new tenants – ideal for short to mid-term flipping.
Method 1: Leasing The Commercial Property
Method 1 is the typical commercial real estate investment avenue, designed to provide stable long-term rents that can easily pay off a commercial mortgage whilst collecting an eventual profit on the initial investment.
Since the tenants will also be responsible for much of the property’s maintenance, leasing the property is also a hassle-free path to a buy-to-let income that often far exceeds its residential counterpart. The yields of commercial rents are much higher, but the capital appreciation is low.
Seeing a profit on your investment could still take years compared to flipping a commercial property in a hot market.
Method 2: Develop, Renovate or Change the Property for Resale
Method 2 resembles a standard residential property flip.
There are two broad approaches here:
- Buy the property and renovate within the same Use Class
- Change the Use Class
If you’re looking to renovate and flip a commercial property then you need to be aware of its Use Class that restrict what the building can/can’t be used for.
You can change the Use Class and sometimes, this is covered by Permitted Development Rights (PDRs), meaning that you won’t need planning permission.
Whether or not making any changes to the use class of the building depends on what you want to do with it.
You can read our in-depth guide on industrial building planning permission here.
Buy the Property and Renovate Within the Same Use Class
The Use Class Order sets out the legally defined and permitted uses of property in the UK.
It is often possible to alter a building considerably within the same Use Class.
Commercial buildings may fall into one of several use classes, but typically fall into:
- A1 to A5 – Shops, takeaways, professional and financial services, restaurants, cafes and drinking establishments
- B1, B2 and B8 – Offices, light industrial and storage and distribution
- Sui Generis (meaning a class of their own) – Betting shops, launderettes, casinos, arcades, agricultural buildings.
- C1 – Hotels
Commercial properties can be purchased and renovated using PDRs, including the addition of extensions. This can provide a profit-making angle without planning permission or a change in Use Class.
Example 1
A purchasable shop may be in a rundown and inoperable state. It might have been running at a loss, forcing the freeholder to sell.
By purchasing the shop without tenants and fitting it out with better infrastructure, e.g. super-fast wireless broadband and networking technology, this rundown shop might present an easily flippable opportunity that better suits the local area’s demographics. You won’t need to change Use Class and it’s unlikely that you’ll need planning permission
New tenants can be secured off the back of renovations and the property can then be sold, with tenants installed, for a quick cash profit. This would have to be weighed up against the returns of keeping the property and collecting rent instead, but if the profit from the flip is substantial, you’ll profit quickly and can move onto a new property.
Example 2
Another example would be a small shop with a flat on top under the same ownership. The owner may not live in that flat at all, they may have their own separate home away from the shop premises. The flat could be used for storage purposes or has become rundown, neglected and ill-maintained.
The property may come on the market as a generic shop, neglecting the fact that the upstairs area can be converted into flats or a maisonette, likely without planning permission.
Opportunities like this might be rare but present a superb opportunity for flipping commercial properties that have become neglected despite their potential for renovation.
Buy the Property and Change Use Class
Flipping a property and changing the Use Class could be a little more involved than a quick flip in the same class.
That said, many Use Class changes are permitted via PDRs and it’s often possible to make major changes without planning permission, even adding extensions in the process.
In the vast majority of cases, changes in Use Class will require Prior Approval from the local planning authority. Prior Approval is a formal submission of plans to the planning authority. It’s more of a review process than a more intensive planning application process, since a change in Use Class doesn’t necessarily mean major external work.
For example, changing an agricultural building to a barn conversion-style house may not make any alterations to the fabric of the building, but will mean the agricultural building itself no longer exists and cannot be bought, sold, used and traded as such.
This may result in an adverse effect on the local economy, e.g. if all agricultural barns were turned into homes and weren’t made available for agricultural use.
As such, Prior Approval focuses primarily on:
- Transport and highway risks
- Contamination, flooding and safety
- Impact on the local area, both the local economy and the sustainability of that particular local industry
- Design and external appearance
One typical change of Use Class permitted under PDRS with Prior Approval is B1(a) (business – offices) or A1 to A5 (shops) to C3 (dwelling houses).
The aim would be to redevelop old, rundown or otherwise disused shops and convert them into housing – this is an extremely popular form of commercial property flipping, especially given housing demand and the relaxed procedure surrounding this particular change of Use Class.
At the moment, this type of conversion is only permitted under PDRs up to 150m2 floor space, but in 2021, the government has pledged to expand PDRs for those wanting to convert disused retail and business units into residential units.
Whether or not you can call this commercial property ‘flipping’ is up for debate – it really depends on how quickly you can gain approved Prior Approval and renovate.
A strong example would be a small shop with a flat already positioned on top, under the same ownership. The flat might be unoccupied and the entire building could be converted into a small house, pending Prior Approval. If the finished property has niche appeal then the value could skyrocket.
Of course, there’s nothing to say that the property would need to be sold, it could be rented to residential tenants.
Method 3: Immediately Sell the Property to a New Buyer Without Making any Changes
Flipping a property as quickly as possible involves making no changes at all. This is also known as property arbitrage. Even though margins are small, with a high enough turnover, a quick sequence of profits can be made across multiple buildings.
Typically, this is possible when the property is selling under its true market price. Something might have gone under the radar of the valuers or surveyors who put the property up for sale.
For example, they may wrongly assume the cost of renovations and repairs, or might not be aware of who to market the building to.
If a non-specialist estate agent is marketing a property poorly, to the wrong demographic, or with low coverage, they may end up reducing the price below the property’s true value.
Management of old commercial buildings can be quite an antiquated procedure, wrought with inefficiencies that drive down prices, especially when the freeholder is not bothered about the property.
Locating these poorly managed, neglected commercial buildings and then remarketing them to a more lively market – perhaps those who are looking to fix and flip themselves – can result in a quick sale.
If you can gain Planning Permission on new renovations or conversions then you may even be able to sell the building onto serious developers for significantly more than you purchased it for.
The Pitfalls of Property Flipping
Inadequate Property Research
Planning rules vary considerably between local authorities, and the legislation is prone to change at short notice. For example, the PDRs to change light industrial units B1(c) to C3 expired in 2020, meaning light industrial units are no longer readily convertible to residential units.
If someone purchased a light industrial unit prior to this change in PDRs, with the intention of converting commercial to residential, then they may be stuck with an industrial unit for which they cannot obtain planning permission.
Furthermore, the Prior Approval process required for most Use Class conversions is also volatile, unclear and varies between authorities. Both local and national legislation and bylaws may alter the Prior Approval process, e.g. if a local authority decides that it needs to hold on to its remaining office units instead of permitting them to be converted into residential units. They can also place an Article 4 directive on the area. Some properties may also be restricted if they’re in a National Park, AONB, or are a listed building. See our guide to PDRs for a full breakdown of restrictions.
A detailed strategy is paramount prior to securing a commercial property for flipping via a change of Use Class. Chartered Surveyors and planning consultants can be enlisted to liaise with the local authority and establish what is possible with a degree of certainty.
Financing Commercial Property Investments
Financing commercial property can be hard enough as it is, but if the building is remaining unoccupied for any significant period of time then securing a commercial mortgage will be difficult without significant investment from personal or business income.
Bridging products provide an alternative, but with expensive rates and a reasonably high-risk appetite, this would only be appropriate when you believe you have a very strong bet in a hot market.
In a cold market, commercial property can be notoriously hard to sell on, and since it appreciates at a much slower rate than residential property, its value vs inflation effectively plummets whilst no rental payments are being collected from tenants.
Interest payments on expensive temporary loans can easily push the project into the red.
Overspending on Renovations
If you’ve ever watched an episode of Grand Designs then you’ll know that virtually every renovation project is under-costed and ends up vastly over budget.
Whilst it is possible to account for almost everything you’ll need to renovate a commercial property, hidden costs are the thorn in the side of many fix-and-flip projects.
Whilst converting commercial buildings to residential buildings might seem simple enough, the new residential buildings will be subject to many building regulations that can seriously impede the pace and budget of a commercial fix-and-flip project.
The new Use Class, whether dwelling houses or something else, will need to adhere to many rules and regulations in order to pass building inspections and other tests by the local authority’s Building Control.
Even if Prior Approval or Planning Permission is secured, this isn’t a free ticket to converting the building as you please – you’ll need to stick rigidly to your submitted plans.
Infrequent Opportunities
Finding commercial property fix-and-flip opportunities is not easy, especially for a property investment novice or someone without prior experience in residential property flipping.
There are many niche angles to find a potential profit, but many of these involve some degree of conjecture and indeed, luck.
Some of the earlier examples; the rundown shop premises with a neglected flat under the same ownership that has fallen into disarray and is improperly marketed by a non-specialist local estate agent – these opportunities are few and far between and will require in-depth, granular research.
And then there’s the influence of bigger developers who are likely to monopolise the larger, more lucrative commercial renovation projects.
Commercial Property Fix-and-Flip: Best Practices for Success
So how can you reduce the likelihood of bombing out on your commercial property flip investment and getting lumbered with a commercial building that you can’t alter?
Learn the Area
Every council in the UK has a slightly different approach to planning and development in their area. Some councils are determined to stimulate certain types of growth and encourage developers to take on fix-and-flip projects to renovate the area.
Other councils are much more resistant to change and can be highly skeptical about whether or not a new development or project is in the best interest of the local community.
Councils have come under heavy criticism for allowing too many commercial units to be converted to poor quality dwellings with questionable adequate building regulations.
Some 54,000 dwellings have already been converted from offices using PDRs between 2015 and 2019, and the sky is not the limit as the opportunities are finite.
Local councils have even placed Article 4 directions on Use Class conversions to prevent too many commercial units from being converted more-or-less irreversibly into residential.
PDRs regarding commercial property flipping in the UK right now are rocky terrain, it pays dividends to consult a team of professionals on your plans. A Chartered Surveyor is your first base, they’ll be able to advise you on a property and help you explore opportunities for flipping.
Learn the Building
Learning about the building itself is crucial for working out what you can and can’t do. If you’re buying to sell after fixing and repairing the building then it’s essential to cost the project up before you make a decision.
Chartered Surveyors will work with you to analyse a building’s characteristics, helping you find a profit-making angle. Since Chartered Surveyors know the local area, planning authority and national, regional and local policy very well, they’ll be able to advise you on what they think is possible with any given building.
Network with Buyers
One of the key elements of successful property flipping is finding a quick buyer. The longer you take to find a buyer, the longer the property goes unoccupied and the more expensive it gets.
Like with residential property flips, it might even be possible to sell the property before completion.
To execute these sorts of flips, you’ll likely need to network with potential buyers. That means finding a niche and networking with potential buyers in that niche.
Find ways of remarketing the property to different demographics, e.g. if a local area has a strong student population then redesigning an old shop to cater to this demographic can create a profit-making opportunity.
Renovate the Building Yourself
Most residential fix-and-flip investors renovate as much of the property themselves as possible.
The benefits are obvious – to keep costs down.
Since flipping is an active income stream, the rate at which you turnover projects is crucial. Leaving a project in the hands of contractors may commit the project to a longer turnover.
Remember that commercial buildings appreciate much more slowly than residential – waiting around is not a valid strategy unless absolutely necessary.
Summary
Flipping commercial property is similar to flipping residential property in principle. Finding a profit-making angle can be tricky and competition can be high, but by thinking outside of the box, there are plenty of opportunities for commercial property flipping that rank as solid alternatives to renting or leasing the property.
Some methods of flipping commercial property include repairing and renovating the property within the same Use Class, changing the Use Class or simply leaving the building untouched, remarketing it and selling it on.
A Chartered Surveyor can help you analyse and building and work out what is/isn’t possible in the circumstances.