Investors are being urged to add commercial property to their portfolios as strong returns make it an increasingly attractive asset class. According to the FT the improving economic outlook is persuading many investors – including a rising number of first-time commercial property buyers – that this is the right time to enter the market.
Although there is still a long way to go before the market reaches pre-recession levels, there are clear signs that a turning point has been reached, and the FT forecasts total returns of over 7 per cent this year. This trend is expected to continue into 2014 with some of the best investments likely to be found in the regions where values fell dramatically during the recession.
“The UK’s recent economic improvement has begun to filter through into property returns, and the wait for rental growth outside London is over – an important signal for improved tenant demand,” says the IPD’s Greg Mansell.
Despite the well documented difficulties facing the retail sector, auction houses report that shops remain popular with small investors, particularly those with flats above. Proposed planning legislation making it easier to convert retail property to residential property is likely to ensure this remains the case.
In the medium to long term regional office properties are expected to become high performing assets. This is because, outside London, there has been virtually no construction activity during the recession and the supply will be constricted when demand picks–up. This will also be the case with warehouse and industrial property.
Despite the improving outlook, private investors are advised to exercise caution when entering the market, with location, lease profile and quality being among the key considerations.
“If you lose a tenant, people often think you go to zero per cent yield. You don’t. You go negative, as you have to take on the liabilities that the tenant typically has, such as insurance and repair.
“Vacant properties are also still subject to local authority business rates,” warns Andrew Jackson, head of wholesale and listed real estate at Standard Life.
For those reluctant to invest directly into the market the FT suggests Commercial Property Funds and Real Estate Investment Trusts (REITs), as alternative methods of benefitting from the projected upturn.
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