Commercial Property: A Good Investment?

Having worked on many deals to secure financing using commercial property as security, we regularly review this asset class. With the wider economy facing an uncertain future we take a look at what that may mean for the value of commercial property.

According to the Bank of England’s Agents’ summary business conditions report in 2018 Q4 investor demand for commercial property remained “modestly ahead of supply” reflecting the “low supply of available stock in many areas”.

The report explains, unsurprisingly, that demand was weakest for retail property but was strong for distribution sheds and warehouses, a trend it put in part down to “the structural shift to online retail”.

In the Guardian’s 2019 stock picks the FTSE 100 warehousing company Segro was highlighted as a business with a bright future – broadly reflective of the Bank of England article in which the trend towards online retail was considered a factor in the bright outlook.

The RICS survey

The Royal Institute of Chartered Surveyors publish a comprehensive quarterly UK Commercial Property Survey that takes a deeper dive into the sector.

The survey looks broadly at three types of commercial property.

• Retail, where demand is down from Q3 by 58 per cent.
• Office space (down 9 per cent).
• Industrial sector (up 21 per cent).

This more nuanced look at the commercial property space shows the stark contrast between the strength of industrial property and weakness of retail.

There were a few other points of note from the survey:

• Unsurprisingly, rents are expected to increase in industrial space, remain stable in office space and decrease in retail.
• Prime office rents are expected to rise but decrease marginally for the rest.
• There aren’t significant regional variations (apart from prime London office space bucking the trend).
• 41 per cent of contributors to the survey expect a downturn in the market as a whole (driven, of course, by the very weak retail sector).

What Does the Market Think?

The Investment Property Forum, a membership body for commercial property professionals, thinks the commercial outlook for 2019 is weak overall, with the exception of industrial property. They predict capital returns will reduce from 6.2 per cent down to 3 per cent and capital values will fall (not in industrial).

Macroeconomic research consultancy Capital Economics believes that in spite of some negative trends they expect the commercial property sector to experience a “soft landing”. They see a worst-case two-year outlook as a reduction in capital value of between 5 and 9 per cent. The Bank of England cites a possible fall of 48 per cent over five years with a “disorderly” Brexit.

Is Commercial Property a Good Investment?

I wish we knew. There is a higher-than-normal level of uncertainty with Brexit on the horizon, but there seems to be some consensus between different bodies: retail and office space (especially retail) is going to worsen for investors in terms of yield and value while industrial will strengthen – but these changes aren’t predicted to be seismic.

Opinions are many but let’s take a look at some of the actions taken by organisations that signal their views:

• According to Deloitte’s London Office Crane Survey, there is 11.8m square feet of office space under construction in London; above the long-term average of 10.5m. So investment in more commercial property is going ahead, in London at least.
• 26 per cent of Asian outward investment was channelled towards London.
• Investment was still going ahead in other parts of the UK too, including a £236m investment in the Highcross shopping centre in Leicester by an unknown Asian investor.
• M&G Real Estate continues to invest, recently spending £115m on the Financial Times headquarters.

City AM called the sector “reliably disinteresting,” i.e. stable, but outlined a few risks:

• Rising interest rates could slow down mainly debt-financed investment in commercial property.
• A strengthened pound may dampen enthusiasm of international investors; a possibility if a Brexit resolution is found.
• Of course, Brexit uncertainty is a large risk to the UK economy, and any macroeconomic slowdown is likely to negatively impact commercial property.

We’ll leave the final word to Paul Crosbie, manager of the M&G value-add real estate fund in the UK. He feels perceived Brexit risks have been “overstated” and he explains that post the 2016 referendum capital prices fell but recovered quickly.

Crosbie’s fund exists to take advantage of undervalued assets that have seen values decrease due to uncertainty but still have strong value – the existence of such a fund indicates some industry insiders at least are confident on the future of the commercial property market.

Want to Invest in Commercial Property – Reparo Finance Can Help

If you need a loan to purchase commercial property or want to secure financing against commercial property, please get in contact.

We are an asset-based lender with a personal touch. When you call us, you’ll get through to a human being who’ll take time to understand your business and proposition before providing the most appropriate lending solution.

We move fast. If you need a loan for any purpose, we have a team in place to help it happen quickly. If you’ve been rejected by a bank but still have security and a plan we can help.

To discuss a loan between £10,000 and £1m, please get in touch with one of the team on sales@reparofinance.co.uk or 0161 451 5714. You can find out more about us on our website:   www.reparofinance.co.uk