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How Does Commercial Property Compare to Residential?
- Saulius Bertauskas
- Feb 25, 2019
- 3 min read
What Type of Investor Typically Invests in Commercial Property?
How Does Commercial Property Compare to Residential?
Are Permitted Developments from Commercial to Residential a Good Idea?
How does Property Partner Select their Commercial Properties?
The UK’s Commercial Property Market and the Rest of the World
Rob: In today’s question, we are going to be looking at, how does commercial property compare to residential, Xavier, because my background is residential, the investors I speak to tend to fall, either on one camp or the other. Either they are a big fan of commercial or a big fan of residential. So, how do they compare in a head-to-head?
Xavier: I think the answer is to have both. Residential has got fantastic characteristics and one of the fantastic things that Property Partner does is it gives you access to that market and takes the headache out of it.
Rob and his colleagues and the whole team deal with all of the regulatory issues, the debt, selecting the right properties that produce this fabulous return and all without the hassle of management. I would be a big fan of that.
As for commercial, it’s a completely different kind of income. It is more income than capital appreciation. As I said before, we’ve got lovely long leases by selecting the right properties and often it is indexed income.
You have got a thing with commercial property which is called the ‘Full Repairing and Insuring Lease’. You have got no management issues, I mean, they are responsible for the entire envelope of the building. And as far as the landlord is concerned, he arranges the insurance and the tenant pays for it and for any other common repairs. That is all written into the lease and the tenant picks up those costs.
They are fully aware of it, the rent reflects it and so, your income is triple net. You know what you are going to get. You can plan it then, over a period of years and that is a great adjunct to everything else you are doing.
Rob: And then the commercial aspect, my understanding is that the values are mainly driven by the yields and the income. Is that right?
Xavier: If you look at it, over time, the main driver for the return is the income and then it’s topped up with the improvement in capital value, over time. So, sometimes you get a great win because you select the right area and that area is improving and there are other people moving into the area and there is growth in the town or area or whatever it is. And you get a consequent increase in that.
Or, the institutions decide that is an area that we really should be into. Heavy money comes in and drives the capital value, which is what has happened to the distribution warehouses.
Rob: So, you have to try and spot those opportunities prior to those institutional advances.
Xavier: Well, you can do that but you don’t necessarily have to. I think that if you are selecting something like convenience stores, the bulk of the return is going to be income and through indexed REITs.
And it’s a sector where there is continued demand for the tenants and there is tremendous competition amongst the tenants. So, you can imagine that once you’ve got a company, in a particular location, there is a good following for it, you can bet that is going to be repaid, in terms of its location and attractiveness as an investment.
Rob: The old adage of ‘location, location, location’ is the same for residential and commercial.
Xavier: Exactly.
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