The increase is good news for the sector, reflecting last quarter’s growing investor interest in commercial property as an asset class. However, opinion remains divided on whether the present market improvements are a 1990s-style bounce or the start of a longer term recovery, given the absence of a strong occupational market.
But, why the sudden interest in commercial property? The key lies in the potential returns on offer.
Commercial property yields now provide a return of circa seven percent – up to eight percent in some cases. At the same time the asset class maintains prospects for good capital growth as a result of the 40 plus percent drop in values since 2007 – for overseas investors the weak pound delivers a 60 percent discount from the market peak.
When combined with the relative affordability of debt, the above contrasts positively against the return provided by cash, which is stalled for at least the medium term by the record low interest rates of 0.5 percent.
Tentative prospects for an improving global economy, combined with returns on offer and potential for long term growth have therefore lowered investors’ risk profile to commercial property. As more and more re-enter the market, following the lead set by more seasoned opportunistic investors earlier in the year, the demand is lifting prices. However, investors’ appetite for risk has not increased to such an extent to extend demand beyond prime stock, delivering a polarisation in the market.
Grade A property let on long leases to government or corporate tenants has been the favoured investment in recent months; such tenants deliver security of income over the long term despite falling rents, which are capping capital growth figures at present (rents were down 0.64 percent in September according to IPD).
Secondary stock, with lower profile tenants on shorter leases has therefore not experienced the same amount of attention from investors and as a result this sector of the market has not experienced parity in capital growth. For many investors secondary stock is still an uncomfortable risk. As the recession continues to be felt across the wider economy rental levels are decreasing as vacancies rise and demand falls away.
UK unemployment levels may have showed signs of stabilising this month, settling at 2.47 million and a weaker pound sterling – down more than 20 percent against the Euro since the onset of the economic crisis two years ago – may support exports, domestic tourism and manufacturing but this is not yet being felt on the high street and in small businesses. Until it does, polarisation within the commercial property market will continue.
Looking ahead, as demand swallows prime stock supply and an improving market begins to encourage banks to release stock from their impaired books, those seasoned investors with a lower risk threshold, cash to spend and a keen eye in sifting the wheat from the chaff may find that there are some good deals to be had within the secondary market.
Lambert Smith Hampton (LSH)
LSH is a leading commercial property consultancy with an unrivalled national network focused on the UK and Ireland property markets. Its expert teams deliver a full spectrum of transactional and consultancy services and business-driven solutions for clients. LSH is the ‘UK’s most active national agent’ and ‘Top National Office and Industrial Agent’ (Estates Gazette’s ‘EGi Deals Competition’)
Lambert Smith Hampton’s (LSH) Cambridge office is a commercial property consultancy providing property services and advice in Cambridge, the surrounding area and nationally. With LSH clients have the added advantage of each office being backed by the strength of a national office network. For clients, this means 10 key divisions and over 850 professional staff working together to address the commercial property difficulties you may face, anywhere in the UK.
Lambert Smith Hampton is a founder member of the Elite Cambridge Business Circle.
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Lambert Smith Hampton
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