The Contrast Between Commercial And Residential Property

Investors are showing a keen interest in the commercial property market in the recent times

. The upheavals of the equity market in the past showcased the benefits that the real estate market can have in ensuring a highly diversified portfolio. The returns from a property investment is characterised as a stable source of income and thus is highly suitable for people who find it hard to depend on the inadequate income that is derived from pension. Till the recent times, commercial propertyhas been the prerogative of professional and institutional investors and worth 762 billion. The estimated worth of private residential market is calculated around 3,400 billion.

The commercial property sector revolves around offices, shops and industrial property and occupies around 80% of the total market. Almost 50% of this can be categorised as investment property and is rented out to tenants. The number of investment property is on the rise.

There are number of individuals and organisations who are investing in commercial property in the UK.Pension funds and insurance companies in the UK occupy the largest chunk of investment property. The institutional investors also possess ownership of large indirect holdings through their stakes in pooled and unitised funds, limited partnerships and property unit trusts.

Commercial property certainly proves to be lucrative enough as an investment. One needs to realise the fact that the commercial property market is vastly different from market for residential properties. Residential property investment has developed over the past decade with increasing property prices, small size of the properties and also the easy availability of mortgages has prompted several private investors to mark their foray into the buy-to-let market. There are some important differences between the two markets:

Residential tenants enter into a contract for a comparatively short duration. On the contrary, commercial leases are signed for a long term for a span of at least 10 years or so.

Commercial tenants are generally responsible for property repair whereas landlords are responsible for ensuring repairs of residential property.

Residential property returns are derived from increase in terms of capital value, whereas a large section of the commercial property is derived from the income.

Commercial properties come at a higher price, at hundreds of millions of pounds, especially in case of office buildings or shopping centres.

Commercial properties offer a stable and secure source of cash flow. Commercial property leases, on an average extend a contracted income stream for a span of 7.1 years depending on the date on which the lease expires. The duration of new leases has been minimised over the last decade. In 2005/06, the lease span for retail property was 10 years. This has been reduced to seven years for offices and even less than that for industrials. Thus office space in the UK is available for a similar period of time. The income derived from commercial properties is in fact one of the major attractions in case of commercial property holdings, especially in a low-inflation environment in the current scheme of things.

by: Steven Hayes

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