Commercial Investments vs Residential Property?
Commercial Investments – An Alternative to Residential Property?
Generally low entry, are commercial investments a viable alternative for individuals who perhaps, due to Brexit fears, do not currently want to invest so much capital in property?
- Investing direct with off-plan projects
- Investing in ready-built commercial property
- Investing alongside a developer
UK developers experienced a withdrawal of funding between 2008 and 2010 as a result of the credit crunch. Mortgage lenders simply pulled their funding and took ownership of developments. Developers lost millions as a result and this has made them cautious to work with lenders and more open to alternative methods of finance.
Other headwinds faced include the cost of house building going up. This is due to building materials becoming more expensive for Britain to import, the devaluation of the pound and increased labour costs.
Developers have been looking at selling their developments off-plan and requesting stage payments for their developments. The process has been created with the investors’ interests in mind. The investors’ funds are typically released to the developer’s solicitor and are only used for actual building works as they are incurred. The contractors are paid on a fortnightly basis and the developer only gets paid from the surplus funds at completion that way their interests are aligned with the investor.
There are certain actions that you can take to minimise your risk for example investments such as off-plan student developments. Universities have failed to build an adequate amount of student housing for years now, resulting in a severe shortage of accommodation. This has paved the way for private investors to get involved, and due to the shortages, there is a continuous high demand, resulting in excellent returns for investors and an ever-occupied unit.
The student and off-plan UK property development projects are most suited for investors looking for a medium-long term investment because at completion they take full ownership of the high-yielding property investment. Full ownership rights including the ability to sell the property are retained by the owner and they can typically expect a 3-5% annual capital growth depending on the rental increases or local supply and demand fundamentals.
We source care home investments that are already running and have a record of successful operation. If you decide to purchase a room in one of these care homes, there will be more supporting documents to aid your research, and you will be able to investigate how the company has traded in the past.
Similarly, with student property investments. Sometimes our investors decide to release equity and sell their unit on. You will then have an idea of how much rent a unit is achieving and the occupation history.
The advantages of investing in property that is already built and operating is that you will have more data to analyse in terms of what rents have been achieved, occupancy rates and the capability of the developer and management company. The downside is that when bought new, there is often a return that is written into the contract for a set number of years. If you buy it halfway through that period, you will be missing out some contracted returns.
Commercial investments, such as crowdfunding have become increasingly popular over the years. Platforms such as LendInvest have sprung up, allowing investors to lend directly to borrows, and vice-versa, whilst cutting out the middle man. The platform allows capital to be pooled together collectively from many investors, who in return receive a fixed return per loan, rather than a share of the net profits. The investment is secured against the property, in effect a backed credit agreement using the equity in the property owned by the borrower.
Commercial investments such as crowdfunding are suitable for investors who do not want to get mortgage, do not want to invest as much capital, or want to spread their risk by investing with multiple developers in various regions and projects.
E.g. there is the possibility of a “loan note investment” with a Manchester property developer from 20k. Stephen Beech established his property portfolio in 2001, and now his property portfolio is currently valued at £25million with a net asset value of £15million. He has won Shell’s LiveWire Young Entrepreneur of the Year Award and has since turned his attention to refurbishing previously unloved property in Manchester.
Through crowdfunding, investors can typically achieve 6% yields. A similar alternative that allows for higher returns of up to 8% is the loan note investment.
These opportunities are ideally suited for high net worth investors who have a good understanding of, or who have participated in this type of structured investment before. One of the known risks is a credit risk that the developer could go bankrupt. One Touch Director Arran Kerkvliet comments “we like the structure of this loan note because the loan note holders have the first charge over the property and there are no other holders of charges or equity. In the worst-case scenario if the buildings were not to be completed the loan note holders completely own the asset.”
With interest rates being at an all-time low, and inflation creeping over the Bank of England’s 2% target, it is foreseeable that interest rates are going to go up. For investors considering purchasing property, their potential mortgage interest rates could be higher. On top of the negative impacts of Section 24, investors are seriously considering more medium-term investments such as the loan note where they do not have to get a mortgage.
If you've decided to progress with a commercial property investment as opposed to a buy to let, why not discover the key components of the student property market or how to access the care home sector
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