Commercial or residential property investment?
March 25, 2022
Commercial rental yields are heading south and residential rental yields are trending in the opposite direction. So it is little wonder many funds and institutions, that have historically focused on commercial, are now rapidly exploring the residential portfolio opportunity. At the very least many are looking to diversify in a split strategy holding a portion of both commercial and residential.
There are many factors driving this new thinking and approach. The rise of WeWork made all aspects of commercial, especially office space, trendy and hot property, and everyone wanted to be in commercial. The subsequent correction of WeWork's valuation, which was long predicted by many of the good analysts in the commercial space, has resulted in commercial property now being far less interesting and attractive. The new TV 'WeCrashed' drama series is unlikely to help the decline.
Add to this the post-Covid wholesale change in the workplace environment with many employees demanding flexible working arrangments so that they spend less time in the office and more time working from home. Many organisations have also recognised the increased productivity and wellbeing factors linked to this new flexible approach. Once again, the result is that commercial office space is less attractive and now often half empty. This will continue to have an adverse impact on both demand and yields.
At the same time, residential property yields across the country are going up. Space and gardens are the new top-yielding drivers with more people working from home. Landlords have seen yields increase and capital valuations boom! A new driver with people returning to their offices for part of the week means inner-city or commutable accommodation - apartments and flats - for a few nights a week, are now also proving very popular as demand again soars for those who now live further away from their workplace and need a part-time 'stay-pad'.
Whilst commercial property investment will always be attractive it has been recognised by many that the residential property investment delivers an equally strong or better, possibly more consistent, and growing return. During times of crisis, like we have all experienced globally through the Covid epidemic, the residential asset class outperformed commercial property and many other less stable investments. Those funds and institutions looking at long-term value creation have recognised existing tenanted residential stock is very attractive.
This is really highlighted in the US where a tech-enabled business called Roofstock - a marketplace for buying and selling residential investment property (sound familiar?) has just raised over $200 million and has been valued at nearly $2 billion, highlighting just how important this residential property sector is to investors.
The big difference in the UK is that we have far less space for new rental homes and less than 3% of the existing private rented sector (PRS) asset class is owned by institutions with the vast majority owned by individuals and small landlords (with less than 5 properties). This means unlike the US, Germany and the Netherlands, and many other countries where the institutions and funds own more than 25% of the residential investment property stock, it has been very difficult for all these businesses to access existing UK residential property at scale.
Fortunately, Vesta, the UK's marketplace for buying and selling residential investment property is well placed to support. With over £500 million of stock already listed and access to a lot more, we are already helping many funds, institutions, and individuals access residential investment property at scale.
If you are considering selling or buying an investment property or simply want an investment valuation, please get in touch, or visit www.vestaproperty.com/sell so we can start the process with you.
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