The Big Match: Residential - v- Commercial

Over the past several years, numerous small-scale investors have found residential investments to be more accessible. Fuelled by historically low interest rates spanning over a decade, residential properties have often yielded higher returns compared to traditional avenues like High Street Banks. Moreover, owning residential property boasted several advantages over commercial investment:

• Typically requiring a lower initial investment
• Securing a mortgage, especially Buy to Let mortgages, was generally more straightforward and affordable compared to commercial loans
• With house prices on the rise, there was a substantial demand from tenants unable to purchase their own homes.

These benefits outweighed potential drawbacks such as ongoing maintenance costs, tenant turnover, and the responsibility for repairs if tenants neglected the property.

However, in August of last year, the Bank of England raised the base interest rate to 5.25%, the highest level since 2008, and has maintained it since. Consequently, mortgages, including Buy to Let mortgages, have become pricier, catching many investors off guard. Concurrently, residential property values have plateaued and are anticipated to decline due to the surge in interest rates and soaring inflation.

In light of these developments, many traditional residential investors may pivot towards alternative investments, such as commercial real estate. Certain sectors, notably industrial properties, have experienced heightened demand powered by the surge in online shopping, expedited further by the Covid pandemic, and post-Brexit supply chain disruptions. This surge has led to a greater need for storage spaces, coupled with diminishing supply, resulting in rising rents.

From an investor's view, commercial properties offer distinct advantages over residential ones:

• They provide more long-term stability, often secured by leases spanning 5 to 10 years
• Tenants typically bear the responsibility for property repairs during the lease term, thereby reducing ongoing maintenance obligations for landlords
• Higher rent yields translate to a greater return on investment

In the upcoming months, it's expected that small investors will explore alternative investment avenues, with commercial property likely a prominent choice.

Please email Neil neil@ramam.co.uk if you have any questions about the above or require advice on commercial property investing.