Damian Lloyd, the Director of GVA, has given a lot of thought to whether the commercial property market is making what he refers to as a “positive U turn.” Unsurprisingly he begins by noting that, while London has numerous opportunities for investors, conditions have not been as encouraging in other parts of the country.
Yet over three times more money is being invested by pension funds in property than in the infrastructure class. Furthermore, research conducted by GVA shows that the prime property market remains healthy, while the secondary market is increasing. A number of investors are continuing to look to property as an option with a potential for a higher return on investment than stocks or bonds.
Commercial property transactions added up to £35.5 billion in 2012, which was a six per cent increase over the previous year’s figures. Almost half of the transactions (47 per cent) were made by overseas buyers; in 2011, foreign buyers accounted for 12 per cent of transactions.
While there has been an upturn in interest in commercial property, investors are still exercising a certain degree of caution before making a decision to commit funds. There have been issues with supply and demand in the office, retail, and industrial sectors, while rents and yields have remained stubbornly low.
The lack of stock means there are fewer investment opportunities for buyers. When suitable properties come onto the market, investors are faced with having to make a buying decision quickly. Some investors are choosing to hold onto their current portfolios, rather than being forced to make what they feel is a hasty decision in a volatile market.
In the past, retail has been the first sector to show signs of life following a recession. Despite the increasing popularity of online shopping, many customers still want to be able to see and touch goods for themselves before deciding whether to make a purchase. In fact during 2012 over 90 per cent of the £311 billion spent by UK shoppers was spent in store. This means there is still a place for retail property in the marketplace.
The office sector can present challenges for inexperienced investors. Anyone who is looking to enter the market must budget for the up-front costs of buying the property, as well as making improvements to the building on a regular basis, both to retain current tenants and attract potential occupiers.
Savvy investors will look for buildings where tenants have been paying relatively low rates for rent. These types of assets have good prospects for rental growth in the future, while the likelihood of the building requiring extensive capital repairs may be lower than with other properties.
The industrial sector has historically performed less strongly than the prime office or retail sectors due to less significant rental growth. It could be poised for stronger growth in 2013 due to industrial and logistics becoming more active.
Distribution warehouses are the prime properties in the sector. Currently, there is a shortage of large, well-equipped premises with modern facilities. More traditional warehouse spaces located on the edge or out of town may be considered as secondary markets. Investors can still achieve good returns on investments by choosing relatively modern and well-specified units.
According to Lloyd, the commercial property market has “finally turned” and the level of activity will increase throughout the rest of 2013. He believes there are many opportunities for growth in the market in the retail, office, and industrial sectors to bring investors to the table.
