Exploring shop tops: the pros and cons of these mixed-use developments

With the redevelopment of Newcastle’s inner CBD, there has been a rising trend towards mixed-use developments and shop tops.

Retail shop tops are an innovative form of mixed-use properties that combine commercial spaces on the ground or lower levels with accommodation above or at the back.

Where zoning allows, residential accommodation on top (or at the back) of shop tops can also be leased and this provides investors with the potential for two different income streams from the one premises. This instant diversification of a property portfolio makes shop tops an enticing investment to both first-time and seasoned investors.

Let’s explore the pros and cons of purchasing these types of properties.

Pros of investing in shop tops

1. Shop tops make excellent first-time commercial investments

For those venturing into commercial real estate for the first time, shop tops provide an ideal entry point. These properties offer investors a dual revenue stream from both residential and commercial rentals. Savvy residential investors may also feel more comfortable with a certain level of familiarity with the types of properties they’ve held in the past given a portion of the property will still be rented for residential use.

The commercial spaces within a shop top provide a stable income while residential units contribute to the long-term property value and potential appreciation.

2. Shop tops allow investors to diversify their portfolio and income streams

When investing in property, a diverse portfolio strategy provides a level of protection to investors against economic downturns or fluctuations in demand for certain asset classes. Shop tops combine the stability of commercial leases with the growth potential of residential rentals. Buying a shop top instantly provides investors with a diverse income stream that provides them with a cushion to economic shifts in any single asset class.

3. Shop tops use space efficiently

If you’re purchasing land for development purposes, shop tops use space more optimally and efficiently. Revenue generation is increased simply due to the one space being occupied by two different types of property.

Before investing in any land or development opportunity where a shop top is planned, be sure to check if the site is appropriately zoned for mixed-use and allows both commercial and residential leasing.

4. Shop tops cater to evolving market trends

Recent market trends have shown demand for convenient mixed-use developments is increasing. There’s a desire currently for properties that blend living and working spaces.

This blend of commercial and residential property within one premises often means investors are less likely to be impacted negatively in times of downturn and can improve the chances they will experience capital growth on their investment.

Cons of investing in shop tops

1. Shop tops can result in management challenges

Balancing the needs of commercial and residential tenants requires effective management as conflicts may arise between the two. If you’re planning to invest in shop tops, it’s recommended to speak with the team at Commercial Collective and have the property managed by our experienced asset management team.

2. Be aware of zoning and regulatory hurdles for shop tops

Shop tops must be appropriately zoned for mixed-use purposes by the council. Investors therefore can face zoning and regulatory changes as local ordinances and regulations can change, affecting the feasibility of such developments.

Always do your research and consult with the council and our team for their expertise on buying and leasing mixed-use developments before investing in shop tops.

3. Shop tops can see higher turnover rates in occupants

There’s potential for shop tops to see higher turnover rates than other forms of commercial or residential property. And changes in commercial tenancies can also impact the overall atmosphere and desirability for residential tenants to live nearby.

Commercial property tenant changes in the building can result in residents wanting to move elsewhere should they wish to be located close in proximity to these types of businesses. Likewise, businesses can be impacted should residential properties above them become vacant for some time.

Increased tenant turnover can disrupt income flows and pose management challenges for investors who don’t put in place effective asset management for their properties.

4. Shop tops have higher construction, repairs, and maintenance costs

The dual nature of shop tops means initial construction costs for these properties are generally higher.

Both commercial and residential properties incur repairs and maintenance costs as well. So although the diverse income streams these properties provide are of benefit, it’s important to look at the whole picture and consider how the outgoings of not one, but two properties will impact on cash flow. Investors should look at the overall return on their investment after expenses and not just the income earned for shop tops, just as they should with any other type of property investment.

Consult with the expert team at Commercial Collective

Navigating the complexities of shop top investments requires expertise. The team at Commercial Collective are invaluable partners on this journey.

Their knowledge of local markets, experience in handling mixed-use properties, and network of industry contacts can provide crucial insights and guidance.

Consulting with our team ensures investors make informed decisions, navigate regulatory hurdles, and optimise the performance of their shop top investments.