Investing in commercial or residential property – which is best? 6 Sep 2021
Commercial or residential property?
According to a recent analysis from a London agent, despite residential property earning significantly lower yields than commercial property, it’s still more popular with investors. From that information alone, it seems like the answer to ‘which is best?’ might be obvious, but it’s not actually quite as cut and dry as that.
Firstly let’s look at the differences between each of these.
RESIDENTIAL PROPERTY INVESTING
This is when you invest in houses or apartments for people to live in via a tenancy agreement, usually, an Assured Shorthold Tenancy unless it is being rented via a company for their employees to live in, if it is a high rent over £100,000pa, a pied-a-terre tenancy or a property where the landlord also lives in a part of the accommodation as a resident landlord. With an AST you are subject to the Housing Act 1988, 1996 & 2004 amongst many other pieces of legislation, and the length of your lease is likely to be between 6 and 24 months.
COMMERCIAL PROPERTY INVESTING
This is where you invest in property that is for commercial use, such as an office, retail shop, warehouse, hotel, manufacturing plant etc. Investors in commercial units will usually lease them to a business and many companies prefer to lease their space rather than to buy it. It does mean, however, that you are at the mercy of the success of the business leasing your space, so you are advised to be very thorough when choosing your tenant.
There are a few things you also need to consider:
First of all, you need to look at how much money you have to invest in the first place, as that may well determine the route you need to follow: On average commercial investments require an initial budget of nearly £200,000 more than residential property investments. This could be a limiting factor straight away for someone looking to invest in property, without such a high amount of initial capital.
Scotland achieves the best commercial property yields with an average of 20.4%, and they also have the best residential yields of 4.4%. If you look at an average across the UK though, commercial property investment offers annual yields of 10.7%, which is 7% higher than the average yields for residential property.
Life after Covid
Both residential and commercial sectors have been heavily impacted by the pandemic, and this impact makes it a bit more of a challenge to say for sure where investment is best placed. However, having said that, with restrictions now lifting and businesses opening up across the UK, the commercial sector especially is set to see a bounce back.
Savills have reported that for them, July saw the highest take-up figure since March 2020 on commercial property, and is the third consecutive month where they’ve been seeing an increase. Although anecdotal, this is incredibly encouraging for the commercial sector, on the whole, showing that perhaps businesses aren’t completely ditching premises in favour of flexible home working.
Despite the commercial sector being predicted a slower recovery than the residential sector, that means there is great potential for those looking to achieve higher yields from a longer-term investment.
Your required effort
First-time and amateur buy-to-let Landlords in the Private Rental Sector (PRS) are likely to spend more time on tenant issues and property maintenance, whereas those investing in commercial property via a third party are taking a much more hands-off approach.
Some investors may want to roll up their sleeves and get involved, whereas others may be happier for others to manage this while watching their investments from a distance.
So, which is better, commercial or residential?
The conclusion is unclear
The answer is, it depends.
Commercial property requires, on average, a higher initial investment and post-covid sector recovery is slower than the residential sector which could see commercial landlords waiting longer to see higher yields.
However, there is much more residential property available especially with London and the South East accounting for 19% of all residential listings, as well as being on-the-whole more affordable for those looking to begin investing in property.
The best approach is to still evaluate each investment on a case-by-case basis, and building a mixed portfolio according to the pros and cons of each property.
Get in touch with Joel
I have been a part of the Perry Holt team since 2008 whereby my knowledge on the commercial markets across South West Hertfordshire has grown extensively. I oversee the commercial agency department for all sectors, this ranges from small retail units to large industrial off-market sales.
My client range is very extensive incorporating large institutional funds to small one off landlords. I pride myself on being one of the leading agents in Watford and surrounding areas due to building fantastic relationships with local occupiers and landlords. One thing I am most proud of is being responsible in my time for nearly £200 million in sales and acquisitions.
Outside of work I am a family man with Gizmo the dog and enjoy good food & company.