UK properties to invest in
Different property sectors to invest in
UK Property Sector Markets
There are many different sectors within the UK proprty market. Two of the main sectors are the residential and commercial property market. Each come with their own benefits and drawbacks, as we explain below.
The Pros and Cons of the Residential Property Market
- The Residential Property Investment Market
- The benefits of investing in residential property
- The downsides of investing in residential property
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The Pros and Cons of the Commercial Property Market
- The Commercial Property Market
- The benefits of investing in commercial property
- The downsides of investing in commercial property
The property sector should be one of the first things you think about, before you even consider location and budget. Those aspects will come later once you understand the fundamentals of the property sector you have chosen to invest in. Before deciding on property sector, you will firstly need to define what goals you want to achieve with your investment. Are you looking for capital growth or rental return? You may want to familiarise yourself with those terms first, we wrote a post explaining what capital growth and rental yields are.
The Residential Property Investment Market
When considering property sectors as an individual, you can broadly define them into two groups. The first is the residential sector. The residential sector includes your traditional buy to let. Whether it be an old “doer-upper” type house that you purchase for below market value in the hope that once refurbished you will be able to turn over for a profit, or a new build in an area you think will see plenty of regeneration. Both types of properties are residential buy to lets. Of course, the properties can be purchased for different purposes. With an older property that needs work, you might need to be more hands-on with regards to organising repairs. You would also need a sound knowledge of the market and how much the property could potentially sell for once it is brought up to the standard of comparable properties in the area. These properties could be turned around in a matter of months for a healthy profit if you have done your research right. However, when the market sentiment is cautious you may have to hold onto the property for the medium term so it will be important to ensure that the rental income covers your finance costs.
Several investors have chosen the simple method or purchasing new build apartments “off-plan” in an area experiencing regeneration. If you don’t want to experience any development risk, some completed units are available but without the discounts that off -plan purchaser manage to secure.
These properties will come key-ready with furniture packs and are generally tenanted by young professionals. These could be held onto in the longer term until the area realises its potential and property prices increase. To achieve good levels of capital growth, investors should generally hold onto property for a longer amount of time.
It’s worth noting that unless you are buying a house to renovate, people usually invest in the residential property market to achieve long-term capital growth. This means that fundamentals such as regeneration, transport links, proximity to commercial and business centres and property trends are key indicators of future growth prospects.
The buy to let properties that we offer our investors have a starting purchase price in the region of £200,000. When buying property off-plan, one would typically pay a 30% deposit and the balance by way of mortgage upon completion.
Overseas investors would generally find it a bit more challenging to obtain a mortgage and the interest rate would be higher that UK residents may enjoy. However, interest only mortgages are available which is not customary in other countries. For more information read our buy to let mortgage guide.
In general, the rental income covers the mortgage and running costs. Property professionals sometimes say “It washes it own face”. Your gains are made from capital growth. Places like Manchester achieved 35% growth since 2015 due to the regeneration of Manchester.
In the UK, property prices have been increasing steadily since the 1990s. The 2010s saw average property price growth of 33% alone according to figures from Nationwide. Prices are buoyed by demand and as there is a lack of housebuilding and a change of household dynamic, we cannot see demand being met any time soon.
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The benefits of investing in residential property are:- Higher capital growth can be achieved - Relatively stable – property prices in the UK are always increasing - Investors who purchase off-plan will have time to raise the capital needed either through a buy to let mortgage or by following the developer payment plan
The downsides of investing in residential property:- Lower rental yields - Stamp duty and no mortgage interest tax relief makes it increasingly difficult to make a profit - Investors may have to be more hands-on with their property in terms of sorting out maintenance and tenancy issues
If you leaning towards residential buy to let property investment, you can explore the To find out more, we recommend you download our buy to let fundamentals guide to help you decide whether it is right for you.
The Commercial Property Market
The second property sector we will be talking about is commercial property. Commercial property is defined as buildings or land used to generate a profit, either from rental yields or capital growth. This is as opposed to residential units that are used primarily as individual residences.
Commercial property does not solely include offices and retail spaces. It can also extend to healthcare centres, hotels, and student property. In fact, these tend to be the three types of commercial property that individuals invest in and that we offer here at One Touch Property.
If you are looking to achieve high rental yields as opposed to capital growth and only want to own the property for a couple of years before selling it on, you should be considering commercial property. Commercial property is considered to be a high yielding UK property sector.
With these types of investment, area demographics are important to consider. Recent data shows that the universities with better rankings and job placement prospects continued to attract higher volumes of students and greater proportion of overseas students, whereas lower ranked universities such as Bradford had lower numbers and reduced occupancy levels across the student properties. Where many students remain at the family home for example. Similarly, if you invest in a care home, you will not choose an busy inner-city location with a low proportion of elderly residents. Although they would be found close to town centre, the preference would be for market towns and coastal villages.
The benefits of investing in commercial property
- Higher rental yields achievable
- Lower entry point
- Management company in place – hands-off investment
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The downsides of investing in commercial property
- More volatile – could be subject to market trends and demand
- No mortgage availability – investors must have the full cash amount
- Limited scope for capital growth
- Operator risk – choosing a tenant for a long term commercial leases
While the different sectors have different merits, overall the UK has the fourth most valuable real estate market in the world according to research by Savills. If you choose the correct property type in the correct location, you have created the ideal environment to generate income. Last year, Zoopla reported that the UK's property market is the strongest it has been in five years, despite the Coronavirus pandemic. This demonstrates the resilience of the UK property market, where demand is underpinned by a lack of supply. As the government continues to fail to meet house building quotas, demand for available property will only intensify.
If you are attracted by high yields and only want to own property for a short time, a commercial investment may be more for you. To find out more about retirement property, read our analysis on what makes a good retirement property investment. Similarly, if you want to find out more about the student property market, read our fundamentals of the student property market report.*
As you can see, there are pros and cons of each property investment sector. The suitability depends on your individual circumstances and financial goals. It may be worth exploring the options in more detail and having a strategy meeting with an experienced member of the One Touch team. If you'd like further guidance, read our investing in UK property tips guide.
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