Should you go up or go out? The answer will vary from property to property and owner to owner, and depends upon a number of factors. In terms of adding monetary value, statistically you should get a higher return on your investment with a loft conversion, although an extension comes a close second, which is way ahead of installing a new kitchen, but it all comes down to the same location, location, location. Planning restrictions might make the loft impractical while a lack of outside space could mean that covering what little you have with concrete will make your property less desirable.
Ask an Estate Agent
Speaking to your local estate agent should garner some advice about extending properties in your area to add value. This can also be affected by your plans to move, or not, as there is generally a five year delay before property prices catch up with building costs. If the expense pushes your house price above the going rate in your area you are on to a loser from the start.
How big is your budget?
Generally loft conversions will be cheaper than extension projects but there are a number of factors to take into account. Consider if a loft conversion is practical with a few simple questions. Stairs are a major factor as any new work will require strict adherence to building regulations, as these are the only means of escape in case of a fire. In addition, the room they need might impact on the space available on the lower level. The existing loft space will probably need to be extended with either dormer windows, a hip-to-gable (converting a sloping roof to a flat edge) or most expensive of all, a mansard conversion, which gives the most space but requires major structural alterations. Planning permission could halt your intentions at any stage.
Go with the Flow
If you own a typical Victorian terrace house then the classic path is to extend into the side return with the intention of increasing the size of the kitchen at the back. There is also the opportunity to go up a storey at the same time. Check with your neighbours and see if you can agree on a project for both properties at the same time, loft conversions, house extensions, both can benefit from major savings through shared costs of labour, heavy equipment and structural work.
Unless your are a developer you will be expanding your home as somewhere to carry on living in so any plans have to work with your lifestyle. If you go up into the loft will the extra stairs be a barrier to making the full use of the area. Do you need an extra bedroom, bathroom, office, play area or larger kitchen? Cost and returns may be factors but the expense of moving because you do not like what you have created is also a consideration.
Down is also an option
A basement extension will be the most expensive as it needs to be waterproof but if that is the only option left it is worth looking at, especially in expensive residential locations. Digging under a garden is cheaper than under the building itself but a large cellar is an obvious opportunity.