Sarem Eddie Kerman compares yields from UK commercial property and residential property

Sarem Eddie Kerman is an Investment Director at London-based Pelican Partners, a private equity and real estate investment firm.

Property investors currently unsure about where to put their money should look at the latest analysis of the commercial and residential sectors.

The pandemic continues to impact both UK commercial property and residential property markets, and for some, this can mean insecurity. However, analysis shows a clear bias towards commercial property in terms of yields.

Yields are higher from UK commercial property investment

While investors continue to be more interested in backing residential property projects, the bigger yields are actually from commercial property.

Recent analysis from London-based agents Benham and Reeves clearly shows that the average yields expected from commercial property investments outweigh residentially.

Across the UK, commercial property investment gives annual yields at an average of 10.7%. Compare this with the average yearly UK-wide yield for residential property, which stands at just 3.4%, and the difference is clear.

There are, of course, regional differences within commercial property, with higher yields mostly coming from northern areas of the UK, although the Southwest also offers high yields.

Data shows that the highest commercial property yields in the UK are currently found in Scotland, which offers an average of 20.4%. The next highest yields for commercial property investment in the UK are in the Southwest at 13.7%, followed by Yorkshire and the Humber at 12.9%.

The best residential yields for investors are in Scotland at 4.4%, followed by the Northwest with an average annual yield of 4.3%. It would, therefore, seem to be a no-brainer for investors looking for the best way to use their money within the UK property sector. However, there is, of course, a difference between the initial outlay needed.

Should you invest in commercial or residential property?

The average residential property in the UK for investment purposes costs the investor £259,850. This makes it possible for investors starting out with lower budgets to get started. A commercial property investment, on the other hand, costs an average of £454,384. This means that an investment in UK commercial property generally demands a budget 75% larger than a residential property opportunity.

Despite the impact of the pandemic on both the commercial and residential property markets, investors can find great opportunities. Times of crisis, change, and uncertainty always bring with them exceptional opportunities for investors who are looking in the right places and who understand how to mitigate higher risks within their portfolio.

Now that the UK is approaching a status of being fully open after prolonged lockdowns, we’re likely to see both property sectors continue to go from strength to strength. At the time of writing, statistics show that the level of commuter traffic is finally matching pre-pandemic numbers. This is the strongest indication yet that the commercial property sector is likely to return to normality.

During the height of the lockdown, there was much talk about remote working becoming the ‘new normal’. However, now that we are more than a year and a half into the pandemic, this attitude has changed. It appears that businesses expect staff to come in, and retail and hospitality outlets are keen to be open as much as possible to begin to recoup lost profits.

Positive opportunities for investors in commercial property

These signs are positive for commercial property investors in the UK, providing office, hospitality, and retail subsectors opportunities. There has also been a notable expansion of logistics and manufacturing subsectors, as they increase operations during lockdown to match the new demand.

Investors considering taking their first step into the UK commercial sector must consider several factors before making that initial investment. These include the best sector to aim for, the ongoing requirements of that investment decision, the potential for capital gain and the disparities between different UK regions.

Investing in UK commercial property is likely to end up delivering a higher yield. However, the post-pandemic recovery timelines will inevitably last longer than that of the residential market. This is why investing in residential property is the most popular option currently due to its more immediate availability and affordability.

However, investing in commercial property offers a viable approach for investors who want to hold a more remote position. Investing through a third-party threshold, for example, provides a hands-off income without the associated hassle of dealing with day-to-day issues.

For example, a first-time investor in buy-to-let property is more than likely to find themselves spending time, money, and effort on dealing with the inevitable issues caused by tenants.

The best investment approach with the UK property market is to create a balanced portfolio. It should consider the pros and cons of the whole market and consider the differences in outlay and likely yields for both commercial and residential markets.

Current statistics for both the commercial and residential markets

At the moment, the residential market in the UK is much larger than the commercial. The former has around 541,966 listings compared with 12,022 for the commercial property sector. The value of the residential sector is also greater.

Other key numbers for the UK’s real estate market, according to global business platform Statista, include:

  • In Q1 2021, £2.12 billion was invested in offices.
  • In Q1 2021, retail investment reached £1.01 billion.
  • The biggest industrial real estate sector in the UK is currently online retail.
  • Industrial property investment reached £3.25 billion in Q1 2021.
  • The prime yield of retail warehouse property in the UK is 6.5%.
  • Residential property in the UK is worth £6.8tn.
  • The last 12 months have seen house prices in the UK increase by 8.9%.