Good Return on Investment for Commercial Property in the UK: What Investors Need to Know

If you scroll through any property forum, arguments about what counts as a “good” return on commercial real estate never really stop. Some swear by industrial units on the edge of London. Others dream about retail spaces in city centres. And there’s always one person ready to brag about their friend’s cousin who struck gold on student housing in Liverpool. But what actually makes a return impressive, and what’s just marketing fluff? Let’s unpack the myths, get into the numbers, and find out what savvy investors really look for in commercial property returns today.

Understanding ROI: The Mechanics Behind the Numbers

ROI – or return on investment – in commercial property is about much more than just a rent cheque every month. It’s the percentage that tells you how much you’re earning relative to your initial money spent. But the real magic is in the details: how numbers like net yield, capital appreciation, risk, and local demand play off each other. It’s tempting to think there’s a single golden number to aim for, but real estate throws curveballs, especially when you compare regions or asset types.

The simplest way to calculate ROI is:

• Net Annual Income divided by the Cost of Investment (including purchase price, stamp duty, professional fees, and refurb costs) times 100 = ROI %.

Say you buy an office block for £500,000. After costs, you’ve spent £540,000. If you get £48,000 net rent each year, your ROI is (£48,000/£540,000) x 100, or about 8.9%.

But don’t trust a headline yield without digging in. Always check if “yield” is quoted as gross (before costs), net (after), or if there’s future rental growth forecasted in. In the UK, especially for prime commercial property in cities, typical net yields sit between 5% and 7%. More secondary, riskier assets might boast 8% or even double digits, but they’ll likely bring voids and problems. A report from Savills last year clocked prime London office yields at around 4.25%, while retail parks outside the capital hit closer to 7%.

The market never stands still. Before 2020, office yields could sometimes dip under 5%. COVID-19 battered office demand, but prime logistics and warehousing boomed – for example, logistics yields in the Midlands reached 4.5%, according to Knight Frank in 2024. What your mate earned in Manchester in 2018 might be history now.

Here’s a quick comparison table, using typical 2024 figures:

Property Type	Prime Net Yield (%)	Notes
Central London Office	4.25	Low risk, high demand
Retail Park (Regional)	6.5–7.0	Residual vacancy risk
Logistics/Warehouse (Midlands)	4.5	Rental growth expected
High Street Retail (London)	5.5	Fragmented recovery
Student Accommodation (Regional)	5–6.5	Seasonal demand swings

So, what counts as “good”? For most investors, an ROI above 7% for UK commercial property looks attractive in 2025, but anything over 10% is a red flag unless there’s a strong reason. Always ask: why is this return higher? Is it vacancy risk, dodgy tenants, or the building needs serious work? Sometimes a steady 5% in a solid area is smarter than chasing big numbers with big risks.

What Drives Return on Investment in Commercial Property?

The UK market is a patchwork, shaped by location, tenant strength, lease length, asset type—and now, environmental credentials count more than ever. Investors chasing “quick wins” often get tripped up by hidden costs, regulatory changes, or suddenly empty buildings. Here’s what really sits behind the ROI headline:

• Location: A prime address in London or Manchester rarely stands empty, but it’ll cost more upfront. Peripheral towns might seem cheaper, but demand can dry up quickly if companies move out or high streets struggle. Plus, transport links, local infrastructure, and upcoming regeneration all play a massive part.
• Tenant Profile: A long-term blue-chip tenant (think big supermarkets or banks) slashes risk and means steadier income. But flexible work trends are shaking up office demand; in 2025, hybrid workspaces are hot, while old-style offices lie empty more often. Always run a credit check and ask for references—startup tenants can disappear overnight.
• Lease Terms: Longer leases with rent review clauses, repair obligations, and minimal break options are gold dust for income stability. Short, rolling or break-heavy leases bump up void risk and eat into returns as you cover empty periods or re-letting fees.
• Condition & Compliance: Got an EPC (Energy Performance Certificate) that’s below ‘C’? From April 2027, you won’t be able to let many properties in the UK unless they meet minimum green standards. Upgrades eat into ROI, but ignoring the rules could leave units empty and almost unsellable.
• Local Economy: Remember Carillion? When major employers collapse, whole property markets seize up. Keep an eye on local jobs data, new developments, and large employers’ fortunes.
• Taxes & Charges: Rates sting, service charges jump annually, and repairs don’t come cheap. Allow at least 25–30% of gross income for running costs unless you’re in a triple-net lease where tenants cover the lot.

For investors outside the UK, currency swings deserve a mention. The pound’s value can make a juicy return look much smaller—or bigger—depending on exchange rates and Brexit fallout.

If you see numbers way above the local norm, ask why. I’ve learnt (after one painful lesson involving a roof that leaked on week two) that promised ‘exceptional returns’ often come with invisible strings attached. Always check the details, and never believe a spreadsheet alone—it pays to visit in person or hire a trusted surveyor before buying.

Comparing Strategies and Risk Levels

Different commercial property routes suit different stomachs for risk and hands-on work. You can buy a shiny city-centre block and collect safe rent for years, or go bold by grabbing a tired building, refitting it, and hoping the refurbished asset attracts new tenants at a higher price. Both strategies have fans—and pitfalls.

• Core Investment: The “buy and hold” game with prime assets, top tenants, and long leases. Reliable (if unexciting) returns, often below 6%. There’s low hassle—but you compete with big money from pension funds and global investors. Clara always laughs when I call this the “buy it, forget it, and check your statement twice a year” method.
• Value-Add: You spot an asset that needs work—maybe it’s under-managed, more than half empty, or behind on energy standards. Here, you invest time and cash to upgrade the premises, boost the rent, and maybe sell at a premium. Typical target ROI jumps above 8–9% after works, but don’t underestimate the headaches: dodgy contractors, over-budget refurb, or new costs you didn’t spot. This takes time and hands-on effort—Fern still teases me about how many months I spent living on phone calls during our second project.
• Opportunistic: Chase big returns and brace for risk: vacant shopping centres, auction properties, land for redevelopment. Returns can hit 12–15% if everything goes right—or you could end up with an asset nobody wants. Lenders are jittery about this end of the market, especially since rates started climbing again in late 2024.

Folks new to commercial real estate sometimes forget just how hands-on even a “passive” property can get. You’re still fielding calls when the boiler packs it in or chasing rent reviews if inflation spikes. Think carefully about how much time, cashflow, and mental energy you can spare before you commit to a riskier bet.

Having a local network helps. I once found out about essential scaffolding rules that applied to my shop refurbishment thanks to a chat with a local builder in the pub—he saved me £4,000 in avoidable council fines. Don’t underestimate ground-level contacts.

Tips for Maximising Returns and Common Pitfalls

Too many people dive in chasing yield and ignore the small print. Learning from others’ mistakes (and yes, making a few yourself) is half the battle in property. Here’s what’s stood out for me and friends over the years:

• Never skip the due diligence. Commission a proper building survey, not just a drive-by valuation. Those hidden structural repairs can wipe out expected profits before you even sign the lease.
• Account for void periods. Even in strong locations, allow for at least 1–2 months lost per five-year cycle, especially as tenants get fussier post-pandemic.
• Shop around for finance. Lenders’ appetite for commercial is up in 2025, but rates and terms vary wildly. Fixed-rate deals help you avoid shocks from sudden Bank of England moves.
• Negotiate wherever you can. Landlords sometimes forget to ask for upward-only rent reviews or to pass service charges to tenants—these small tweaks can add thousands per year.
• Plan for upgrades early. EPC regulations are tightening fast. If your building slips below standard, you’ll need to invest to keep tenants—which eats into that tasty headline yield.
• Understand your exit options. Will you sell to another investor, convert to flats if rules change, or hold for the long haul? Flexible assets (think mixed-use or buildings in growth zones) tend to hold their value best.

If you want a quick checklist on what matters most for ROI:

1. Location strength (now and future)
2. Tenant reliability and lease security
3. Building compliance and condition
4. Total ownership costs (don’t forget taxes and charges)
5. Exit potential (what if your strategy needs to change?)

For anyone juggling family responsibilities and trying to invest wisely—I’ve learnt to double-check the maths when I’m tired, and Clara’s advice on “go and see it yourself” has saved me more than once. Letting someone else run the numbers is fine, but if you want to sleep at night, work out what risks you’re really willing to take.

Last thing: UK commercial property isn’t a one-size-fits-all game. Your definition of a good return will change as the economic outlook swings, your appetite for risk shifts, and legislation evolves—especially around energy rules and taxation. Keep learning, stay curious, and don’t get blinded by big numbers alone. Focus on strong commercial property ROI backed by real demand and solid management, and your investment stands a much better chance of surviving whatever comes next.

• July 15 2025
• Archer Hollings
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