January 12 2021

Commercial or Residential Property – Which Investment For You?

January 12 2021

Commercial or Residential Property – Which Investment For You?

Author: Amber FurrCategory: UK Property
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Deciding which UK property sector will work best for you? Read our overview of commercial and residential property to help you decide.

It’s one of the key questions that property investors ask at the start of their investment journey.

“Which type of property should I choose?”

Whether you’re a first-time property investor, or even if you’re a seasoned one, there are plenty of things you need to consider before making your decision.

You can read some useful information in our recent articles that can help you during the initial property investment research stage:

Property Investment Glossary: All The Key Definitions

How To Invest in Property in the UK

Buying an Investment Property – 10 Things You Need To Know

In this article, we’re going to look at two of the UK’s largest property sectors – commercial vs residential rental property.

Both sectors are hugely popular with the global investor community, and can help you to achieve strong, consistent returns. But when addressing what is the difference between commercial and residential property, knowing their individual qualities will help you to understand which one is best placed to help you to achieve your personal investment goals.

Below is an overview of both sectors and how they compare.

What is commercial property investment?

Buildings classed as commercial properties are generally those that have a primary purpose for housing businesses.

Income and returns are achieved in the form of regular rental payments from businesses leasing workspace, while capital appreciation is also achievable in the long-term.

Commercial property is more generally favoured by institutional investors, such as pension funds.

An first floor of a cafe on the ground floor, representing a commercial property

Is buying a commercial property a good investment?

As with any UK property investment, commercial property makes for a strong long-term investment, trusted by generations of investors worldwide.

It’s important to understand the advantages and disadvantages associated with commercial property investment:

Advantages of commercial property investment

  • High yields are achievable
    • Especially in cities with large, booming economies and undersupplies of commercial real estate in area of high footfall and commerce
  • Property maintained to a high standard
    • Businesses will take care to look after your property as it is their business, which helps protect the longevity of your investment
  • Professional tenants
    • Dealing with companies and businesspeople is likely to be a professional experience, which should help alleviate some of the stresses associated with property management

Disadvantages of commercial property investment

  • Performance can be significantly determined by the wider economy
    • In times of recession and financial downturns, commercial property is impacting much more than residential property
  • Potential for long void periods
    • As commercial property is in less demand than residential property, finding a new tenant for your commercial property may take longer, meaning a prolonged period where you are unable to generate an income
  • Tighter lending restrictions
    • Mortgages on commercial property tend to have lower loan to value ratios, meaning you may find it more difficult to secure leverage

Useful resources for the latest UK commercial property news

You can keep up to date with the latest research and data from the commercial property sector with the following resources:

Knight Frank Research Library

Savills Insight & Opinion

Telegraph Commercial Property

What is residential property investment?

A residential property provides a place to live for either an owner occupier or tenant in the rental sector.

Typically, buy-to-let property has been the largest residential investment sector in the UK over the last 30 years. These are usually homes originally built and designed for owner occupiers that have been converted into rental homes for the private rental sector. In recent years, the purpose-built (build-to-rent) rental property sector has expanded rapidly, and for many is now seen as the modern residential rental investment in the UK. You can read more about build-to-rent property here.

Like commercial property, you can earn a regular income with residential property in the form of rental returns, and long-term returns with capital appreciation.

Private investors generally favour residential property, particularly as it’s a property type many of us are all generally familiar with.

A modern decor living room in a residential home

Is buying a residential property a good investment?

Unlike many other asset classes, UK residential property is renowned for its strength and resilience even during times of wider uncertainty. People will always need a place to live, and regardless of wider economic concerns, this will never change.

Here are some of the main advantages, and points of consideration, of investing in residential property:

Advantages of residential property investment

  • High yields are achievable
    • If you own a high-quality property in a popular residential area in a market of low supply, your asset can command premium rental rates from local tenants
  • Performance determined by supply and demand levels
    • In England alone, 300,000 new residential homes are needed each year just to meet current demand
  • A sector of national importance
    • Residential property prices are integral to the UK’s economic health, meaning the UK government has a vested interest in maintaining growth in the market

Points of consideration before investing in residential property

  • Property management is time consuming
    • Unless you choose a fully managed investment, handling duties from sourcing tenants to making necessary fixes and upgrades yourself will take up a lot of your time
  • Void periods are possible
    • If you are without a tenant for an extended period, will you be able to cope financially?
  • Will the property you own remain desirable in the long-term?
    • You will need to ensure that you property can address evolving tenant demands and attitudes to remain attractive in the marketplace

Useful resources for the latest UK residential property news

You can keep up to date with the latest research and data from the residential property sector with the following resources:

Knight Frank Intelligence Lab

Savills Research

Nationwide House Price Index

JLL Property Trends & Insights

Select Property Group Insights

In summary – choose the sector that’s right for you

While commercial and residential property have their own qualities, both retain the fundamental benefits that underline property as an asset class. They are physical, tangible assets that can help you achieve a regular income stream and strong long-term growth.

Before making any new investment, it’s important that you consult with an independent financial advisor to discuss your options in full.

Furthermore, Select Property Group is one of the UK’s leading property developers and investment specialists. Our team would be delighted to share details of our latest residential and student property investments with you – contact us here.

 

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