Life has been made harder for residential buy-to-let landlords over the past decade. An avalanche of tax reforms and stricter regulations since 2010 have made buy-to-let increasingly unattractive. It is no wonder that around half of private investors are threatening to exit the sector within a year.
Those affected by the buy-to-let squeeze are starting to tap into new types of asset, such as commercial property, for their returns. The idea of owning a light industrial, warehousing or logistics unit may not seem that attractive initially, but the ease, stability and risk return profile will.
Here, I look at the contrasting rules of owning residential and commercial buy-to-let property and offer insights on making a first foray into industrial property investment.
Taxes, mortgages and fees are the bane of residential buy-to-let landlords in today’s market.
Although buy-to-let mortgages are similar to an ordinary residential mortgage, the fees and interest rates tend to be much higher, reducing returns.
Favourable tax incentives are also being phased out, meaning residential buy-to-let landlords can no longer deduct the full cost of mortgage interest payments from their rental income to reduce their tax bill. Coupled with this, since April 2016, buy-to-let landlords have faced an additional three per cent on top of standard stamp duty. As an example, more than £5,000 would have to be paid on a house valued at £175,000.
Securing a commercial mortgage with sensible fees and rates is now much more straightforward than it used to be and tax incentives still exist.
Residential buy-to-let landlords typically have to accept tenants on short leases, with the average tenancy being just under ten months in 2019. In most cases, residential leases aren’t long-term agreements and this leaves landlords with the inconvenience and cost of finding new tenants, renegotiating leases and liaising with letting agents. All the while, the property is left vacant if there is a break between two leases, with an average annual length of around 24 days diluting income.
These issues are much reduced for landlords of commercial buy-to-let property. Businesses looking to lease industrial, warehousing and urban logistics units want a long-term commitment for their operations, typically five years. For investors, this means more security and less dilution of income.
Investors need to find properties which match their portfolio ambitions and budget to ensure their investment is a success. Residential property was long seen as the best route for high yields, but the market has shifted and this may no longer be true.
In London, the average residential property price is £628,416 with the average price for a flat being £508,151. This is a big, one-off financial outlay – and for an average rental yield which currently sits at 3.7 per cent, you may think twice. Of course, London has its own economy, but even regionally across the UK residential landlords are faced with pretty underwhelming return on investment (ROI).
Comparatively, buy-to-let industrial and warehousing property can offer a smaller outlay with better ROI. For example, an investor could purchase an industrial and warehousing unit in the north of England for as little as £250,000. Yields do vary, but they are often higher than residential buy-to-let yields. Combined, this makes a compelling proposition for most investors.
The UK’s retail sector has changed significantly over recent years. There has been huge movement away from the high street, with traditional retailers embracing multi-channel operations and specific e-retailers such as Etsy, eBay and Amazon proliferating. This trend shows no signs of slowing either, as online purchases are set to account for 53 per cent of retail sales by 2028.
The move towards an online marketplace points to a boom in demand for industrial, warehousing and logistics. New online start-ups are moving directly from their proverbial kitchen table to a small unit on a business park, instead of the high street, whilst established businesses are consolidating their offices and warehousing into one unit. These online occupiers are competing for units with more traditional industrial occupiers from whom demand is also robust.
Yet there is currently a real undersupply in the industrial property market, especially for new build, Grade A smaller units. Many sizeable towns across the UK haven’t seen a new industrial park constructed for 15 years.
This supply/demand dynamic has resulted in strong rental growth and property market analysts are projecting this to continue. Market trends like this make industrial property a financially astute proposition for private property investors.
Times have changed since the heyday of residential buy-to-let. As the market continues to be squeezed, the clever money is on commercial property. Investing in buy-to-let commercial and industrial property is often more straightforward, brings higher yields with greater tenant security and income growth prospects.
Chancerygate offers freehold industrial and warehousing units for sale in strategic locations across the UK. Our asset management team currently manages £220m of assets across 4.9m sq ft of commercial space in more than 350 units. To view our latest developments, click here.