The Big Match: Residential v Commercial

Over the years, many small investors have seen residential investments far easier to become involved with. Buoyed by over a decade of low-interest rates never seen before, residential has offered a greater return than that to be gained from High Street Banks.  There were also many advantages to owning residential property when compared to, say, commercial investments:

• Typically a lower initial investment
• Easier to get a mortgage – Buy to Let mortgages were usually lower than commercial mortgages
• High demand – with house prices rising, there was high demand from tenants unable to get on the housing ladder

These outweighed the potential ‘cons’ of:

• Regular ongoing costs – maintenance, statutory checks etc
• The potential regular churn of tenants – ASTs of 6-12 months
• Liability for repairs if not maintained by a tenant

In June this year, the Bank of England raised the base rate to 5% - the highest level since 2008.  As a result, mortgages, including Buy to Let, have become more expensive, which many investors had not accounted for.  At the same time, residential values have stagnated and are predicted to fall due to the increase in interest rates and high inflation.

As such many traditional residential investors may well turn their attention to alternative investments, such as commercial property.  Certain markets, in particular industrial, have seen a boom in demand from occupiers, boosted by the explosion in online shopping (accelerated further during the Covid pandemic) and post-Brexit supply headaches.  This has resulted in the need for more storage space which, along with falling supply, has increased demand which has seen rents rise.  From an investors perspective, commercial properties do offer the following advantages when compared to residential:

• More long-term stability – leases typically 5-10 years
• Tenants are normally responsible for all repairs to a property during the lease term, meaning less ongoing maintenance/repairing obligations for the Landlord
• Higher rent, therefore, provides a greater return on the investment

As a result, in the months ahead, expect many small investors, in particular, to seek alternative markers to invest, with commercial property potentially being high on the list.

If you have any queries in relation to anything discussed above or require further assistance, please email neil@raeburnconsulting.com