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Commercial Watch: Reassuring news on returns

Despite the current unstable political and economic situation, demand for commercial property remains consistent

In my last piece for Commercial Watch at the end of 2018, I noted that commercial property continues to be a good bet, with industrial space in particular showing growth in demand.

I also observed that the ever-increasing shift towards online shopping was perhaps the biggest factor behind this, and that this was reflected in statistics that showed a steady demand for office space while retail space continued to fall out of favour.

So how has this changed over the past six months? Well, not by much, really. Contributors to the Rics UK Commercial Property Market Survey for Q1 2019 report that “solid fundamentals continue to drive growth in the industrial segment while the struggling retail sector shows little sign of improvement”.

Industrial opportunities

While politically we are as volatile as ever – and economically we are bracing ourselves for a ‘no deal’ Brexit – it appears that it’s more of the same for commercial property.

Predictably, it is the impact of the delayed Brexit negotiations that is chief protagonist in this ‘same old story’ of the last few years. It’s a tale that has twists and turns but leaves the narrative unchanged: investors and businesses are taking the ‘wait and see’ approach – which is stifling growth.

But no news is (relatively) good news, in this case.

In our current unstable political and economic situation, ‘stable’ demand for office space is good news. The industrial sector’s continued “steady rise in tenant demand” is even better news. With or without Brexit, the retail sector would have suffered with the rise of e-commerce as our preferred way to shop.

Which leaves me to reiterate that the opportunity for UK commercial property is good. Really good.

And why wouldn’t it be? More and more property investors are turning to commercial property to diversify their buy-to-let portfolios. It generally offers a more secure income stream from tenants on longer leases, and tenants are usually responsible for most of the expenses, such as repairs and insurance.

Mortgage interest tax relief is, of course, still available too.
The recent market report from Shawbrook and the Centre for Economics and Business Research adds some significant weight to my argument. It estimates that the UK commercial property market is worth nearly £900bn – against [another third-party] valuation of £833bn in 2016.

It also calculates that the returns on commercial property are high compared to other asset classes. Between 2000 and 2018, returns on commercial property were 308 per cent compared to 209 per cent for the FTSE 100.

A bright future

Yields have been stable, too. Average yields across all sectors remain nearly unchanged at 5 per cent since 2015. Even the much-maligned retail sector is performing well, showing the highest yields of 5.7 per cent.

More anecdotal evidence from Rics members: “Contributors are still anticipating further growth across both prime and secondary areas of the industrial market over the next 12 months.”

So, to borrow from my previous article: “Commercial property is still looking like a good investment option with high yields and both prime and secondary industrial space showing excellent growth potential.

“Commercial property has faced economic and political uncertainty in the past, so there is nothing to suggest it will not be able to maintain its competitive edge from 31 October 2019 and beyond.”

Lucy Barrett, managing director, Vantage Finance

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