11 March 2021

Investing in mixed-use development – pros and cons

If you’re considering property investment opportunities, you might be interested in exploring mixed-use developments. When managed effectively, they can provide a greater level of security and income than other properties.

What is considered a mixed-use property?

Properties made up of two or more types of real estate and designed for multiple purposes are described as ‘mixed-use’. For instance, a development in this category might contain retail or industrial units, as well as offices or residential apartments.

The term is often applied to simple shop units with a flat above, but it can also be used to describe huge developments incorporating houses, stores and restaurants. Most commonly, mixed-use properties include shops, restaurants, takeaways, cafes and pubs, or professional services providers, such as banks, legal practices and estate agencies.

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Is mixed-use property a good investment?

Mixed-use developments are often considered great investments because they allow the owner to diversify their property portfolio and reduce financial risk. However, managing this type of real estate requires a significant amount of research and preparation, which deters some investors.

Here are some of the pros and cons of investing in mixed-use property:

Advantages of investing in mixed-use property

  • It has low vacancy rates – Mixed-use properties are in high demand among both residential and commercial tenants as they’re in close proximity to a wide range of amenities. Businesses can benefit from a highly populated location with good levels of customer footfall. And other renters can live near to their workplace or other useful facilities.
  • It has a high rental value – Investors can justify higher rental costs if their properties are located in areas with lots of convenient amenities. Developments within walking distance of green spaces, retail outlets and leisure facilities can draw higher rents than those situated in areas dominated by just one type of real estate.
  • It comes with tax benefits – When it comes to tax calculations, mixed-use properties are generally classed as commercial developments. As a result, they have a higher stamp duty threshold than purely residential buildings, at £150,000 rather than £125,000, and investors can save money when buying them.
  • It offers multiple income streams – By owning developments from multiple property classes, you can rely on revenue from units in other categories when one suffers. As demand fluctuates across various real estate sectors, investors with a diverse property portfolio can enjoy a relatively stable income and plan for the future more effectively.
  • Investors can turn commercial units into residential ones – If demand for office space or commercial units falls in a given area, investors can convert their existing properties into homes. The option to switch property class may not be available to owners of residential blocks, particularly if they’re not in a prominent location.
  • It offers social and environmental benefits – When properties from various real estate categories share a space, the people living and working there can shop locally, reduce transport usage and enjoy higher levels of social interaction. Often, areas with lots of mixed-use properties are pedestrianised, allowing for even better air quality and a greater sense of community.
  • It can reduce costs – Units within mixed-use buildings can share the same utilities services and fire and security provisions. Managing one mixed-use property, as opposed to two or more separate units with different suppliers, can save a significant amount of time and money.

Disadvantages of investing in mixed-use property

  • Businesses may have a limited customer base - Mixed-use properties are often built in high street or city centre locations where parking spaces are at a premium. As a result, businesses may struggle to attract people who don’t live or work within walking distance, and build up a large customer base. In turn, this can lower demand for commercial units in mixed-use properties among certain sectors.

  • It comes with specific rules and regulations – Investors may fall foul of the law if they don’t research their rights and obligations thoroughly. Leasing a unit or converting it from one property class to another without authorisation could result in the owner paying fines or reversing changes, and the tenant being evicted.
  • It usually involves separate leases – With the exception of pubs, commercial and residential units within one property are usually rented out to separate parties. Business leases often last for years, but residential tenants can move out within a matter of months, so investors have to manage distinct and overlapping contracts.
  • Investors need a high proportion of liquid capital – Banks don’t provide traditional buy-to-let mortgages for mixed-use property investors, and even specialist lenders only tend to offer up to 75% of the total sale price. They also generally introduce higher fees and interest rates, which makes it difficult for inexperienced developers with limited liquid capital to invest in a mixed-use property.
  • It requires specialist insurance policies – Investors may struggle to find a product covering more than one property class within a mixed-use building. More often, owners are forced to take out separate policies for each unit, which can be highly inefficient, both in terms of cost and time. To get a better deal, investors must consult an insurance broker with experience in mixed-use property.
  • Investors must understand multiple property sectors – Different property classes come with their own sets of regulations, which can be confusing for investors. If they don’t have experience dealing with two or more types of units, they may need to hire knowledgeable property management teams, lettings agencies or solicitors. Finding suitable business partners can be complicated, especially if you appoint separate parties for different units.
  • There’s a chance of conflict – Putting two groups in such close proximity can cause problems, so investors must take care when choosing tenants. Residents of a flat may become frustrated with the cooking smells, cigarette smoke and antisocial behaviour associated with a takeaway or bar underneath them. Meanwhile, professional services firms could lose customers if nearby tenants are loud and disruptive. Investors who fail to find the right mix of occupants risk becoming unpopular landlords.

Investing in mixed-use property can be a great way to generate a stable income and add value and diversity to a community. Well-suited tenants will appreciate its convenient positioning near to handy local amenities and investors can convert their units if demand evolves.

Although mixed-use property brings its own set of unique challenges, most can be overcome with a bit of preparation. Generally, the higher level of admin involved in the buying and letting process makes this type of property better suited to experienced investors. But, if you’re willing to put in the time and effort, you could stand to benefit.

You can find more tips and advice on property investment in our selection of handy guides.