The property market is split into two main areas – residential and commercial.
Residential property includes:
- second or holiday homes
Commercial property includes:
- office buildings and business parks
- retail space, such as shops and shopping centres
- industrial property, such as warehouses and factories
When you buy an investment property, you can generate income from regular rental receipts. You also have the potential for capital gains when you eventually sell. When it comes to letting residential property, lease periods tend to be very short – typically six months or a year – so your rental income can be uncertain and potentially volatile (when the value of a particular share, market or sector swings up and down fairly frequently and/or significantly, it is considered volatile). It’s also usual for residential properties to have ‘void periods’ when they are vacant while you look for new tenants. This means that income from residential lettings may be unreliable.
The income that can be generated by commercial property represents a more stable alternative to income than can be produced by residential property. This is because:
- it usually involves much longer lease contracts, often as long as five to ten years
- corporate tenants are generally more reliable than residential ones
- they are far less likely to fail to pay their rent
- they tend to give longer notice periods when moving on
Commercial property, however, is usually the preserve of larger institutional investors because of the sums of money involved. Commercial properties can also be difficult to sell quickly.
There are several ways to invest in property:
- directly – buying and managing properties yourself
- equities – buying shares in companies that own and manage property and often are also involved in property development
- funds – investing in a fund which invests only in physical property, or in a mix of direct property and equities, or in equities alone
As a private investor, one way to benefit from the unique advantages of commercial property investment is to invest through a property fund.