Since the 2008 global financial crisis many investors are still questioning the benefits of investing in property. But there are a growing number of property insiders who see property investment as an attractive medium to long-term opportunity worthy of serious consideration. Indeed, Andrew Milligan OBE, head of global strategy at Standard Life believes that, in future, property will yield bigger returns than shares.
WHAT’S THE RETURN?
With all types of property, whether residential or commercial, the return on your investment comes from the rental income and capital growth from the increase in value of the property over time. The rental “yield” is an indication of the return you’ll get from the property each year which is broadly the rental income, less the costs, divided by the value of the property. Average residential yields are currently about 3.5% whilst commercial yields are around 8-10%. Both are far greater than the current savings interest rates offered by the banks.
If you are a direct investor, and unless you are a cash buyer, you will need a specialist commercial mortgage, with higher interest rates and charges and a higher deposit than if you were buying a house to live in. These costs will all affect the return on your investment.
RESIDENTIAL V. COMMERCIAL
Although recent changes in the Buy-to-Let regulations have reduced the return on investment for many landlords, some may still prefer the easy and familiar process of buying and renting residential property especially while interest rates are still low or you have no mortgage on the property. In general, residential tenancies are granted for only six months to a year and the landlord remains responsible for all building maintenance and repairs.
Commercial leases in the UK are, on average, granted for between 8-15 years meaning investors can expect an extended regular monthly income. Tenants can be made responsible for building repairs and maintenance depending on the type of lease granted. But direct ownership of commercial property remains a tangible asset that can be reviewed, modified and redeveloped as demands change, giving investors control over how to respond to shifting trends and occupier needs.
PROPERTY V. OTHER INVESTMENTS
Even if bought directly, many investors still speak of the reliability of “bricks and mortar” investments such as commercial property, saying it provides an income that other asset classes struggle to achieve; especially if it is acquired in a tax-efficient wrapper such as a SIPP.
Other than residential buy- to-let, you may be looking at other types of investment such as stocks and shares (global shares rose last year but with the current geopolitical uncertainties who knows if they will continue to do so), gold (highly volatile and doesn’t pay an income) even Bitcoin (Warren Buffett has called crypto currencies an “unproductive asset”). But remember, property values are more independent of other assets and are not affected by the volatility of the stock markets.
OTHER WAYS TO INVEST
Even if you don’t want to directly invest in commercial property, you can still enjoy returns from it without getting your hands dirty:
◗ Investment funds, trusts or REITS (Real Estate Investment Trusts) – you buy shares in a REIT, not the asset itself, which delivers rental incomes from a portfolio of properties within a tax-efficient structure. You can access your capital more easily but are open to the equity markets.
◗ Indirect property funds – allow you to buy shares in property companies listed on the stock market so returns are provided through share price appreciation and dividend income rather than rental income or property prices.
Relying on expert knowledge and support systems is key to breaking through into property investment. Healys Corporate and Commercial Property teams are equipped with a full range of legal advisers and trusted referrers who can assist you every step of the way in building a successful property portfolio.
For more information on property investment, please contact Sophie Macarthy, Commercial Property Partner at: firstname.lastname@example.org