A new report has found that the commercial investment market remains “compelling” despite Brexit uncertainty.
The UK Commercial Property Market Report, produced by Shawbrook Bank and compiled by the Centre for Economics and Business Research (CEBR) assesses the state of the current commercial property market, exploring the various sub-sectors comprising the market, historic and future trends, and the impact of the changing political landscape.
The report shows that uncertainty over Brexit has weighed on the commercial property sector in recent quarters, as owners and tenants take stock. But despite activity slowing, the market remains a profitable place to invest and deliver a solid income over the medium to long term. Over the past 18 years, the commercial property market has returned 308% to investors compared to 209% for the FTSE100, and yields have remained stable; average yields across the commercial property sector have stood nearly unchanged at 5% since 2015.
Rob Lankey, director of commercial property investment at Shawbrook, said: “Although uncertainty is present, the commercial property market remains fundamentally resilient in terms of both yield and capital growth. Despite investors taking a wait-and-see approach, we believe many are stockpiling cash and simply postponing activity until we have a definitive Brexit outcome.
“With the long-term view and fundamentals of the commercial property market still compelling, I would go as far to say that we will see a ‘post-Brexit binge’ from professional investors looking to utilise the cash they have stockpiled to take advantage of investment opportunities in the post Brexit landscape. However, not every commercial property investment will automatically generate great returns. Doing your homework on potential investments is more important than ever. There are good and bad opportunities within all sectors.”
Underpinning the resilience of the commercial property market are factories, warehouses and other industrial properties, which over the past few years have become the best performing sector over one, three and five years, with yields in line with the commercial sector more broadly. Stockpiling activity and strong demand for warehouses from online retailers have helped the sector to withstand economic headwinds to date, however, the report found that unwinding of the stockpiling effect poses a risk to this asset class as does a no-deal Brexit, which would severely harm many of the manufacturers that are the current tenants of the industrial assets.
Table: capital value growth across industrial, retail and office properties
| Capital value growth | |||
| Cumulative capital value growth | Industrial | Retail | Office |
| One year: Jan 2018- Jan 2019 | 12% | -8% | 3% |
| Three years: Jan 2016- Jan 2019 | 31% | -11% | 5% |
| Five years: Jan 2014- Jan 2019 | 71% | 1% | 37% |
Table 2: (Initial) yields across industrial, retail and office properties
| (Initial) Yields | |||
| Industrial | Retail | Office | |
| Jan-19 | 4.6% | 5.7% | 4.5% |
| Jan-16 | 5.4% | 5.3% | 4.0% |
| Jan-14 | 6.6% | 5.7% | 5.1% |
In the office sector, demand has been strong following the recovery from the last recession. The increasing importance of professional and business services for the UK’s economy provides a strong macroeconomic background for assets in this category and growing popularity of serviced offices is becoming particularly important as new business start-ups and smaller businesses struggle to keep up with rising rents in cities such as London and Manchester and as a result are looking for more flexible spaces.
For retail properties, a number of factors have come together to create a ‘perfect storm’. On the back of a decade of very low real wage growth, consumers have turned away from the high street and increasingly do their shopping online. Recent research on high streets in Great Britain by the ONS shows that 56% of addresses on high streets are now residential.
Lankey added: “The challenges faced by retail won’t be solved by a shift to residential, but the trend will be a significant boost to opportunities for property owners. Irrespective of broad capital value trends, retail property can continue to provide strong rental returns for landlords where the combination of tenant and property location are meeting modern consumer demand. For investors of mixed-use space to realise the full benefits that can be had, there will have to be a level of collaboration in the property sector moving forward. Another beneficiary of the declining high street will be for shared office spaces, such as WeWork which would likely use former retail premises in UK town and city centres.”
Daryl Norkett, Shawbrook’s head of products & markets, added: “Broadly, if we look at the sub-sectors that are performing today and consider the analysis brought to life in this research, there is opportunity for experienced investors to grow and diversify their portfolios. However, it is important to highlight that the current market requires a certain level of expertise, knowledge, understanding and commitment of time in order to make the right property investment decisions but if you do your homework, it can be a great investment.”