Residential vs. Commercial Property in the UK

Are you looking for a solid investment opportunity in the United Kingdom? With such an incredibly dynamic real estate market, it can be difficult to determine which type of property will best suit your investment goals. From attractive city centre apartments offering abundant rental yields to retail units strategically placed in prime shopping areas, investing in residential and commercial properties both comes with unique rewards.  Residential and commercial properties both offer different levels of capital growth potential as well as ongoing income benefits – but which is the right choice for you and your specific financial goals? In this blog post, we’ll take you on a tour of residential vs. commercial property investments across the UK, assessing risk factors, benefits, and return potentials along the way. Whatever path you choose for yourself, our aim is to ensure that you make informed decisions and understand how each type of property could work for your particular portfolios.

 

 

What is Residential Property?

Perhaps the most well-known form of property to UK property investors, residential property in the UK includes houses, flats, and other land and buildings that are used as a place of residence. This can include anything that somebody would generally live in, from huge country estates, cosy cottages, apartments to townhouses.

 

What is Commercial Property?

Commercial property is used primarily for business purposes. Examples of commercial property investments include:

1. Retail (shops, restaurants, bars, cafes and other businesses that provide goods or services to customers. This type of property can range from small independent stores to large shopping centres).
2. Logistics (warehouses and hardstanding for lorries)
3. Factories/Industrial units
4. Offices
5. Leisure – hotels, pubs, restaurants, cafes, sport facilities 
6. Healthcare – medical centres, hospitals, nursing homes

 

What are the benefits of investing in UK residential property?

Here are some potential benefits of investing in UK residential property over commercial property:

Residential property investment is easier to finance

Residential properties are generally more accessible and easier to finance than commercial properties. Commercial lenders may require a higher deposit and have much stricter lending criteria.

Residential property investment has lower entry costs: 

Residential properties typically have lower entry costs compared to commercial properties. This means that you can start investing with less capital.

Increased demand for residential property for rent in the UK

Due to the UK housing crisis and huge numbers of private landlords leaving the sector, demand has skyrocketed.  There is generally a greater demand for rental properties in the residential market than in the commercial market anyway, but with data showing the number of properties available to rent through letting agents in the month of March halved between 2019 and March 2022 the supply and demand imbalance has become further exaggerated. Add this to 140,000 private landlords retiring from the private rental sector last year and a total of 500,000 predicted to leave over the next 5 years as ‘baby boomers’ retire and it is clear to see that supply is rapidly diminishing. With RICS (The Royal Institution of Chartered Surveyors) reporting high demand, fewer lets available and new landlord instructions in negative territory residential landlords are likely to have a larger pool of potential tenants to choose from, reducing the risk of extended vacancy periods and prompting further rental increases. According to the ONS (Office of National Statistics) the average UK rent already increased 4.9% from March 2022-2023, they also predict nationwide increases in the next twelve months.

Long-term growth potential 

The UK residential property market has historically shown lucrative capital growth over the long term, making buy and hold a strong investment option (especially when combined with a passive income strategy). Whilst commercial property can also show strong returns, it can be more volatile and susceptible to market changes.

 

What are the benefits of investing in UK Commercial Property?

Commercial Property Investment Provides Reliable Income

The longer lease terms that are standard on commercial properties translate into more predictable cash flows, making commercial property investments appealing for investors seeking stable and regular income streams. Considering upcoming legislation proposes to introduce ‘periodic tenancies’ to the residential rental market, leases lasting upwards of 2 years are likely to be extremely appealing to UK property investors. For industrial units and factories, it is not unusual to have a lease of 35+ years due to the cost of installing machinery and equipment, providing extremely stable income.

Commercial property income is more passive

Commercial property can be much more ‘hands-off’ as it is usually on an FRI lease.  An FRI lease is a Full Repairing and Insuring lease and under this lease type the tenant is responsible for all repair and maintenance costs associated with the property, as well as insurance and other associated costs. From a landlord’s perspective, an FRI lease minimises liability and reduces the risk of unexpected maintenance costs or damage to the property. Since the tenant is responsible for maintaining the property, the landlord can also be more confident that the property will remain in good condition and continue to generate rental income for the duration of the lease.

You can use your pension to invest in commercial property

If you want to invest in property but do not have huge savings, commercial property has the benefit that you can invest using your pension. There are two different types of pensions which allow you to buy commercial property; a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS). With both of these options, you can borrow up to 50% of the net asset value for the investment.

In addition, there are several advantages to investing in commercial property through a pension fund. These include tax relief on contributions, potential capital gains tax deferral, and access to additional borrowing. Under recent legislation, the lifetime limit on pension contributions has been lifted, making it an astute place to hold your property profits. 

Tax benefits of investing in commercial property

Investing in commercial property in the UK can provide a number of tax benefits. For example, capital gains tax (CGT) is not payable on any increase in value of the property when it is sold, and business rates are generally lower than residential rates. Additionally, investors may be able to claim tax relief on certain costs associated with owning and managing the property, such as repairs or insurance premiums.

Income from renting out a commercial property is also subject to different tax rules than residential rental income. Generally speaking, landlords are allowed to deduct certain expenses from their rental income before paying taxes on it, such as mortgage interest payments or maintenance costs. This can help reduce the amount of tax that needs to be paid on the income generated by the investment.

Additionally, Stamp Duty Land Tax is significantly cheaper on commercial property and if you go as far as purchasing the limited company that the commercial property is held in you only need to pay 0.5%.

 

Should you invest in commercial or residential property?

Ultimately, When deciding between residential and commercial property investments in the UK, there is no clear-cut answer. Each option has its unique benefits and factors to be considered depending on your investment aims, timeline, financial situation, and risk appetite.

Residential property investments typically have lower entry costs, better access to financing options, and a rising demand for rental properties. It is an attractive market opportunity, particularly amid the UK’s housing crisis and diminishing private landlords. As a result, there is ample potential for rental income and long-term growth.

Alternatively, commercial property investments offer stable income streams, longer lease periods, and passive management potential. The expenses related to maintenance in commercial properties typically falls on tenants under FRI leases, creating stable and predictable cash flows for investors. Additionally, investing in commercial property through a pension fund has advantages like tax benefits and opportunities for leveraging.

 

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