Commercial property has long proved to be an attractive asset class. But with the commercial world having been turned upside down by the Covid-19 pandemic many people will be wondering what the future holds for the commercial property sector too. In this report we will take a look at where the UK commercial property market could be heading in 2020 and beyond.
Firstly, a quick look at some of the attractions of commercial property. Commercial property has high yield potential, sometimes in excess of 10%. Commercial landlords traditionally benefit from long leases and so a reliable income, with the tenant being responsible for all repairs. There is also the potential to raise the capital value of a commercial property considerably by signing a good long term tenant. For investors, there can also be tax advantages of investing in commercial property too.
Commercial property can offer more risk. The performance of commercial property is strongly linked to the performance of commercial tenants, ie. businesses. And their performance is very closely linked to how the economy performs, something which is pretty uncertain right now.
Covid-19 has changed everything, and not just the overall outlook for the economy. The pandemic has furthered trends that were already happening, including a decline in bricks and mortar retail and growth in online retail, and furthered the popularity of staying in as the new going out. It has forced new working practices by necessity, such as working from home.
Next let’s look at some price forecasts for the commercial property sector:
* Capital Economics forecasts an almost-10% drop in UK commercial values
due to the economic downturn. Although it forecasts there could be a recovery by the end of 2021. It also says the worst-case scenario could be a 25% fall in commercial property values.
* Research by Sourced Capital, a peer to peer lender, claims that returns on commercial property are currently only half of those of residential property (2.2% versus 5%).
There are of course several different types of commercial property. Many experts point out that they won’t all be affected in the same way.
Offices. Office property could potentially be hit by a recession and low occupier demand as well as the trend towards working from home. Poor quality and poorly located office space could suffer particularly badly.
Demand for office space in the UK could drop by up to 50% as more businesses realise the value of flexibility, according to this report from Instant Offices. They believe that flexible office space like coworking offices or serviced offices could be a growth area though.
Hotels and leisure. Leisure property including pubs, restaurants and hotels has already been badly hit by lockdown. Prospects for this part of the commercial property market will likely depend on how the sector recovers.
Industrial. Including warehousing and logistics. There’s potential for this to be a growth sector in future as online retailers need more space to deliver more and deliver faster.
This report from Reuters looks at whether swapping offices and shops for storage and industrial property is a likely trend amongst property investors.
Retail. Holds potential to be most badly affected by a recession, as even well known national retailers fail, downsize their operations, look to renegotiate their rents or even are unable to pay them.
Convenience retail could benefit though as consumers look to do more of their shopping locally. Savoy Stewart, commercial property consultants, suggest that convenience stores could be a good investment in the coming years.
Looking at the bigger picture this report from Lambert Smith Hampton looks at five positive trends in the retail property market.
Alternative commercial property sectors. A report by Savills, published before Covid-19 hit the UK, says some alternative commercial property sectors could offer better returns and long term stability. It says these alternative sectors include mixed use properties, student housing and healthcare.
Other factors to consider. In looking at the future of the commercial property market there are some other factors we ought to consider too.
Government help for some sectors could help to support the commercial property market, especially bricks and mortar retail and town centre property.
On the other hand, the Government is running a consultation on a proposal to ban local authorities from investing in commercial property for the purposes of raising revenue.
Local authorities have become significant commercial property investors – investing £6.6 billion over the last three years alone – so their withdrawal from the market could slacken demand and cause prices to fall.
So to try and make a few useful conclusions, what does all this mean for the future of the commercial property market in the UK?
Currently the position doesn’t look all that bright for commercial property owners and landlords. But if the economic climate causes commercial property prices to fall it could be a boom time for investors looking to buy in. There could be opportunities to be had in buying up commercial property in a sector which is adversely affected by recession and converting it to a new, more sought after use. Commercial to residential property conversion is also something that could see growth. Alternative commercial property investments, which have been overlooked in the past, could become growth sectors too.