Look beyond residential

CityLiving: You are thinking of buying an apartment to rent out. Perhaps something for the kids when they or older or for your own retirement. But prices are high and rents seem a little uncertain. Perhaps it is time to think in decidedly less glamorous terms and look at commercial property?

Most people think of large office blocks, property syndicates and huge money when they think commercial. Indeed entry costs are higher but with prices starting from around €700,000 it is a possibility for many investors.

Cormac Kennedy head of retail at Gunnes, points out that while an 800 sq foot apartment may cost €400,000 an equivalent sized shop will probably be €650,000.

"You don't need to be a big developer but you do usually need to have some equity built up in another investment or to have come into a fairly sizeable amount of cash," he says.

Commercial property also has some advantages over residential. Tenants are usually there for the long term and leases run from five years to as many as 25 years. In residential in contrast you have to factor in one or two months rent free every year as tenants change. But remember commercial will take longer to rent and a property standing empty for three months while waiting for tenants followed by a three month rent free period is not unusual.

Commercial tenants also usually pay for insurance and repairs. In retail they also pay for the whole fit out of a shop and only a shell is required. In offices they may expect perhaps looking for suspended ceilings but they pay for the upkeep and maintenance themselves. For many investors this is key. No fear of phone calls at midnight complaining of rowdy parties, no hassles with broken heating or clapped out kettles and crucially less worries about rent not arriving.

Of course commercial property has been far more volatile than residential in the past. Downturns can and do happen. The office market for example has been weak over the past few years only growing by round 3.8 per cent a year for the last three years. Retail or shops on the other hand have been a top performer and are up over 19 per cent a year for the last three years according to the Irish Property Databank.

Estate agents say there are limited opportunities to buy shops with offices overhead around the country. But perhaps even more than residential, location is all important. "You can buy a house in Ranelagh and know it will rent out," says Brian Cooney of HOK Investors. "But a shop on the wrong end of the street may not be so easy to rent out." Location is slightly less important for office than retail but is still vital.

Office tenants will be looking for car parking and a reasonable basic fit out.

Access to transport and shops and restaurants will also be important." The market is also smaller for commercial property with fewer tenants who tend to stay put. Of course it is possible to buy a shop which has already been let out but that will also mean paying top prices. "It is far better to buy a vacant shop or unit and then secure a letting," says Cooney. Off the peg investments will not only be very expensive but they are also scarce and in great demand which adds more to the price. And you do not set the terms or the length of the lease.

But you need to be very careful. "Don't just buy the first vacant property you see," says Cooney. Potential investors need to look at the retail pattern in the town they are buying in and local knowledge is vital. Are new shops opening up? Is the town thriving? Perhaps there are Government jobs being decentralised.

After all you do not want space in a town that is being bypassed and where no new jobs are likely.

Offices are even more problematic and vacancy rates remain high. Gunne's Kennedy points out that some suburban business parks have been having a very tough time and many offices are empty. City centre offices on the other hand have been doing very well.

But if you are still keen to go ahead, you need to do is your sums. Unlike residential property, office and commercial is usually both bought and rented on the basis of square feet. For example a typical shop in a medium sized town could be about 500 sq feet and you would expect to get around €40 a square foot. That would translate to an annual rent of €20,000.

If you managed to get a good tenant with a long term lease the yield could be expected to be about 5.5 per cent, according to HOK figures. That gives an approximate capital value of €363,500 or about €325,000 after costs such as 9 per cent stamp duty are taken into account. That translates into a capital value per square foot of about €652. So if you managed to buy the space at €400 a square foot you would be making about €152 a square foot. But if the vendor were asking for more than €600 a square foot you would know you were probably not a loser.