Brexit uncertainty has impacted on the commercial property sector in recent quarters, as owners and tenants take stock and watch the market. However, the sector could now see a boost due to pent up demand, according to a new analysis of the commercial property market from Shawbrook Bank.
The ‘UK Commercial Property Market Report‘ evaluates the current condition of the commercial property market, examining the various sub-sectors comprising the market, the impact of the changing political landscape and historic and future trends.
The Shawbrook report, compiled by the Centre for Economics and Business Research (CEBR), shows that while activity has slowed, the market is largely a resilient and profitable place to invest and deliver a solid income over the medium to long term.
According to the report, the commercial property market has returned 308% in cap to investors compared to 209% for the FTSE100, and yields have remained stable over the past 18 years.
In fact, average yields across the commercial property sector have stood nearly unchanged at 5% since 2015.
John Eastgate, Managing Director, Property Finance Shawbrook Bank, said the research demonstrated that investors operating in the prime commercial space are simply postponing any activity until there was a definitive Brexit outcome.
“The implication is of a potential ‘post Brexit binge’ from professional investors when the dust eventually settles. In the meantime, with capital growth less certain in the short term, we expect to continue to see investors seek opportunities to add yield, for example in secondary commercial assets. This won’t always tick the boxes of a traditional commercial investment proposition and lenders must understand investor strategies to support them. Thus, whilst the short term outlook for the commercial market is arguably volatile, the long term perspective remains healthy. The market remains fundamentally resilient in terms of both yield and capital growth, stands strong as an integral part of the UK economy, and is still an attractive asset for professional investors looking for growth.”
Warehouses, factories and other industrial properties have shown the most resilience during Brexit uncertainty, according to the report. With yields in line with the commercial sector, they have become the best performing sector over recent years.
Strong demand for warehouses from online retailers and stockpiling activity has helped the sector to withstand economic headwinds to date. However, the unwinding of the stockpiling effect poses a risk to the commercial property market.
A no-deal Brexit would also severely harm many of the manufacturers that are the current tenants of the industrial assets, according to the report.
Commercial Property Trends
The report also analyses the impact of key commercial property trends that can have an influence on its value and may be compounded by Brexit. Here are some other key issues to be mindful of.
Location, Location, Location
As the demand for housing, the demand for commercial property units is highly dependent on location, according to the report. If a commercial property, such as a shop or warehouse, is in a distant, poorly connected part of a city, the rents that can be accumulated will be hugely different to those collected from premises in a city centre area close to transport links.
In fact, data from the Valuation Office Agency analysed by the Centre for Cities show that central London commands the highest prices with a median rateable value of £424 per square metre compared to the English and Welsh median of £81 per square metre.
According to the report, the location of a commercial property unit will probably affect capital value appreciation, ‘though any potential changes to the areas in question such as redevelopment programmes or transport upgrades need to be carefully considered’.
As the supply of desirable buildings in well-connected locations grows slowly, investors can profit by ‘seeking out undervalued properties’, the report recommends.
Retail Needs To Adapt To Remain Relevant
Several factors have come together to create a ‘perfect storm’ in the retail sector, according to the report. In the wake of very low real wage growth, consumers have turned away from the high street and predominantly do their shopping online.
In fact, recent research on high streets in Great Britain by the ONS shows that over half (56%) of addresses on high streets are now residential. Furthermore, high levels of political uncertainty caused by the ongoing Brexit negotiations will further weigh on consumers’ minds.
As a result, ‘commercial properties in the retail sector have come under pressure with total returns turning negative towards the end of last year’, according to the report.
Retailers who can adapt to ‘changing consumer preferences’ are most likely to succeed in this challenging environment, it says.
For example, ‘experiential retail’ has become a trend over the past years with e-tailers adding immersive activities to the shopping experience in order to attract customers. Fast-fashion retailer Primark’s Birmingham store features a Disney- themed cafe, a barber’s shop and beauty studio, is one instance of this.
A no-deal Brexit would lead to a more pronounced and prolonged slump in the sector, the report states.
Growing Popularity Of Serviced Offices
Demand in the office sector has been strong following the recovery from the last recession.
The growing significance of professional and business services for the UK’s economy provides a strong macroeconomic background for assets in this category.
The 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 therefore look for more flexible spaces.
The report states that Brexit is having a palpable effect on those services firms which want to persist in serving their clients in mainland Europe.
Demand for office space will also be impacted by staff relocations from the City to other European financial capitals.
In the case of a no-deal Brexit, the economic consequences would likely be felt acutely in the sector prolonging the slump in capital value growth for this category
Helping You In Commercial Property Post Brexit
With more than 30 years’ experience embedded within the dynamic commercial property industry, Prideview Group has helped many clients whether political and economic changes.
Over the past few decades, we’ve dealt with thousands of investments, and know the marketplace inside and out.
Our buying and selling service has also been tailored to increase the benefits and mitigate risks.
If you want to know more about how Prideview can help you, please contact us today to discuss how we can help you.
