Commercial property investment guide - UK28 April 2020
Reasons to invest in UK commercial property
Since the economic crisis in 2008, the UK economy has grown steadily with GDP rising by 20.26% over the past 11 years. In 2019, GDP grew by 1.4% and employment fell to 3.8%. Benefitting from the stability of the market, the demand for commercial real estate remains high. Despite the slowing down of sales amidst the Brexit uncertainty, RCA reported that the UK had the second-largest total for commercial real estate investment in Europe with sales totalling €58.7m in 2019.
Contrary to popular belief, the UK has one of the most tax-efficient environments for investors from overseas, with a number of incentives policies to help support entrepreneurship and the wave of regeneration throughout the country.
Another advantage of choosing to invest in the UK commercial real estate market is that the UK legal system is extremely robust as are the local administrations. This makes it easier for banks and investors to secure finance for their commercial investments.
Why invest in commercial real estate?
Properties rented to large institutions, especially blue-chip companies, can generate stable and reliable yields, allowing investors to benefit from consistent revenue streams paid monthly, quarterly or annually. This stability may make commercial real estate a more attractive option for long-term investment than traditional stocks and shares which can fluctuate significantly.
As most investments are index-linked, normally against a retail price index, commercial real estate can help offset the impact of inflation over time as it is often possible to adjust rental prices according to the rate of inflation.
Commercial yields can often outperform residential yields and are often a more attractive alternative to traditional investment vehicles, such as bonds or stocks. For example, at the end of 2019, industrial real estate, the UK’s best performing commercial market that year, had yields of 7.6%.
Unlike shares which can be there one day and gone the next, commercial real estate is often praised by investors for its tangibility, providing better investment security than money put into financial markets.
Long-term capital growth is a key investment factor too and economic growth results in higher inflation, allowing for strong rental growth also.
The fundamental benefits of commercial real estate span across all markets where this type of asset is available and each market and location presents unique trends and opportunities.
How to invest in commercial real estate: types of commercial properties
This dynamic sector provides opportunities for all investors, ranging from hands-off long-term assets which AAA tenants to more high-risk assets which may be vacant with the potential to change its use. Though retail, particularly shopping centres, has been impacted by a number of structural, cyclical and temporary factors over the past decade, its value should not be overlooked as over 90% of purchases still take place in physical stores. Keeping in line with trends in consumer behaviour, health and beauty and food and beverage markets are tipped to perform the best in 2020.
Whilst offices are one of the most common assets to have within a commercial property portfolio, there are a number of aspects which need to be taken into account before purchasing such as the tenant or tenants, stature of the location and any upcoming projects or developments in the area. With the unemployment rate hitting new lows and business booming in the UK’s major cities, investing in office spaces, co-working or flexible workspaces promises great returns. Offices fared well in 2019 with strong total returns of 6.9% and capital growth of 2.0%.
Industrial assets can actually be a mix of both office and industrial space but are most commonly used for assembly, storage or distribution. There are also specialist sectors such as research and development. Industrial properties normally benefit from long leases of up to 25 years and good rental yields. In 2019, industrial was the strongest performing sector with capital value growth of 2.5% and returns of 7.6%.
From big chains to boutiques, hotels offer good opportunities for investors looking for a secure long-term income. Despite a decline in sales volume, the UK market led the way in 2019, accounting for 26.1% of total hotel investment in Europe.
Residential & Development
Since 2014, there has been an increased demand for residential plots and buildings which can be renovated and extended. With fewer investment opportunities like these in high-density locations such as the capital, many multiple residential or plot development investments made today will become a trophy asset in the near future.
The impact of COVID-19 on commercial real estate
Before the effects of COVID-19 were truly felt in the UK, the commercial real estate industry had a positive start to 2020 with Q1 recording 9% higher sales figures than the Q1 2019.
Once global travel reopens, oil prices go back to normal and the stock market becomes less volatile, the economy is expected to make a sharper and faster recovery from the shockwaves of COVID-19 than those of the 2008 economic crash. This is in part due to the fact that governments and central banks have responded efficiently on a larger scale than back in 2008. UK GDP dropped by 1.8% in Q1 2020 and is expected to drop a further 0.3% in Q2 due to the lockdown measures in place. However, data from Oxford Economics predicts that GDP will pick up in the second half of the year with an expected growth of 1.5% in Q3 and 1.8% in Q4. In the meantime, the weak pound sterling may make UK commercial properties exceptionally interesting international investors, once COVID-19 is contained.