Press & News

Residential VS Commercial Investments

03 02 2021

At the start of an investment journey, the initial question you may ask yourself is whether to invest in residential or commercial property. In this article, we discuss the implications of both investment opportunities in the current climate.

Demand

Both commercial and residential sectors are driven by the level of supply and demand. In the residential market, Rightmove reported their busiest ever start to the year, with website visits up 30% in comparison to the same time last year – indicating demand for living spaces is at an all-time high. With the increased demand and interest in buyer enquiries, there is a further discrepant imbalance in the level of supply and demand in the residential market, which has been a great source of growth in house prices. According to Zoopla’s latest House Price Index, UK house prices have grown by 4.3% – the highest growth since April 2017. Factors such as households re-evaluating their housing needs can explain these high levels of demand, placing residential property as an appealing market for investors. Conversely, the outbreak of the pandemic has put a downward pressure on activity levels in the commercial market, with the value of transactions dropping by 71%.  Restrictions after restrictions have resulted in the closure of many office spaces and retailers, negatively impacting demand in the commercial market. However, looking forward into a post-Covid era, the demand for office space will likely increase as many organisations will choose to go ‘hybrid’ – a combination of remote working and in-office working to suit the needs of the employee.

Risk

In usual times of economic downfall, businesses are the first to be negatively affected, and with the economic impact caused by the global pandemic, business are under further pressure. This has led to thousands of offices, retailers and restaurants to close since the beginning of Covid-19 and put more than half a million businesses under significant distress. However, with the end of lockdown in the pipeline, there is hope the hospitality and leisure sector can essentially ‘re-open’, enabling restaurants, shops and hotels to return to business.

On the other hand, residential property has gone from strength to strength in the UK market, remaining resilient during the length of the pandemic thus far. A major factor driving momentum into the market after the initial lockdown was largely due to the Stamp Duty Holiday, resulting in residential transactions increasing to 8.1% in October compared to the same time last year. This coupled with the furlough scheme, which has supported employees in maintaining financial stability such as rent payments, are examples of how government initiatives have reignited the residential property market into a safe and low risk investment.

Covid-19 aside, commercial investments significantly benefit from long-term leases. This equates to a stable cash flow over a longer period and minimises risk of void periods. This financial stability is a major incentive, whereas residential properties on average, lease their property for shorter periods of time. In the future, when there is more predictability in the commercial market, this factor can help investors determine whether to invest in commercial or residential property.

Price

Residential investments are easier to acquire because of their lower price points. On average, the upfront cost of a commercial property is far more expensive than a residential property. This factor, combined with the fact that bank loans are typically lower for commercial investments, can make it a less appealing choice for investors since it’s a lot harder to get their foot in the door.

Returns

However, we acknowledge the ROI associated with commercial investments can be lucrative, with average income potential around 6%-12%. Earning potential in both investment markets are significantly influenced by location, for instance, areas rich in prime retail areas in the centre of large cities represent some of the highest rental leases across both commercial and residential markets. 

Key takeaways

When market conditions are stable and a property is well managed, both investment types can be extremely lucrative. However, in the current climate, we recommend investing in residential properties based on its lower risk profile and needless to say, soaring demand. Currently, we have a number of residential developments in the property market in areas of highest growth in the UK.

Our developments

At Alesco, our focus is on the UK’s Northern Powerhouse, as we forecast these areas to deliver the highest returns over the next 5 years. According to Zoopla’s latest House Price Index, the growth rate for house prices hit a 10 year high across the northern English regions including the North East, North West, and Yorkshire.

Wardour Point

Our latest striking development is situated in the heart of Manchester – a region widely known of as England’s second city. Manchester has transformed into a modern, and culturally vibrant city which has championed the rental sector in recent years.

Wardour Point is comprised of one-three-bedroom apartments and spacious duplex apartments, all designed with modern living in mind. Available at 20% below market value, the development boasts a scenic living space with landscaped gardens, an onsite-gym and a 24-hour concierge. 

Bishops Square

In Zoopla’s latest House Price Index Report, Liverpool saw the highest annual house price growth in the UK with an increase of 6.3%. This was the highest rate of growth in 15 years, making it the UK’s top property hotspot.

In touching distance of Liverpool city centre, Alesco is proud to present Bishops Square. The development is comprised of 105 residential apartments, boasting a luxury interior design perfect for the ever-increasing young and professional community.

East and Green 

Birmingham presents huge opportunities for investors seeking lucrative returns – affordable properties, strong yields and consistent tenant demand.

As a city who has become the most popular destination for people moving out of the Capital, we are delighted to present our East and Green development. Comprised of high specification one- and two-bedroom apartments situated in the heart of Digbeth, the development boasts an idyllic place to live for the growing young demographic moving to Birmingham.

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