A sea change is underway in the UK's property investment landscape as a growing number of investors swap residential properties for commercial ones, driven by increasing regulatory burdens and tax changes hitting the private rented sector. Key figures from the NAEA Commercial Propertymark Advisory Panel warn that new legislation, including the Renters' Rights Act, has created an environment where investors are seeking more lenient regulations – and finding them in the commercial market.
The trend follows the introduction of stricter rules for private landlords under the Renters' Rights Act, which came into force on May 1. Industry experts, such as Steve Lane and Michael Sears from the NAEA Commercial Propertymark Advisory Panel, say these changes are prompting a re-evaluation of investment priorities. They point out that investors are struggling to navigate the differing tax structures, borrowing ratios, and regulatory requirements between residential and commercial properties.
While entering the commercial market comes with higher financial barriers – typically requiring lower loan-to-value lending – investors are reportedly converting existing residential portfolios into commercial assets in response to the changing regulatory landscape. Many see the commercial sector as a more appealing option due to its perceived 'less legislative stranglehold'.
The performance of commercial properties remains mixed, however. Large office spaces continue to face challenges with low supply and demand. In contrast, smaller offices within business centres are doing well, while independent retailers in the retail sector are showing resilience despite subdued demand from larger national chains.
Moreover, government regulations are set to impact energy efficiency standards for commercial properties. Privately rented non-domestic properties over 1,000 square metres will need an Energy Performance Certificate (EPC) rating of at least C if deemed cost-effective; smaller commercial buildings will continue to meet the existing minimum EPC requirement.