Commercial property is a familiar concept for many more hands-on investors, it’s easy to understand and there is a wide choice of property types available. It offers an alternative way to diversify a portfolio with an asset backed investment in a well-established market. The idea is to purchase a portion or whole property and lease out the space to a long-term tenant, yielding long-term (often inflation linked) returns.
Commercial real estate is divided into three main sectors: retail, office space and industrial (warehousing and factories). Retail is the largest part of the commercial property sector and was valued at £207 billion in 2013, followed by offices at £157 billion and industrial at £80 billion, according to the British Property Foundation (BPF).
Drivers behind the Sector
Investment into commercial property during 2013 totalled £53 billion, the highest since 2007. Current low interest rates and volatility in mainstream markets are encouraging investment, with investors seeing this as a valuable asset class and investing more and more each year into the sector.
Demand for commercial property space from businesses is growing as the economy begins to recover and consumers gain more confidence. Firms are still reluctant or do not have the capital to own property, so renting is an attractive option. Two thirds of commercial property in the UK is currently rented and the trend has been growing for over ten years. While London remains the primary location of interest, other important UK cities with lower property prices are also seeing a large amount of activity.
Returns
Returns on different property types vary and can depend largely on location. The IPD UK Annual Property index shows a total return of 8.4% for retail, 14% for office space and 13.2% for industrial property during 2013 (here is the office space cost per square foot Austin TX, as an example). Steady returns and historically low volatility is driving investors towards commercial property.
Other Market Factors
Some concerns have been brought to light recently with the rapid growth of investment of all types, especially in London, of whether or not we are on the verge of a ‘bubble’. Increasingly more foreign investors are looking to the UK as a safe haven for their money. According to BPF, 22% of total commercial property investment came from foreign investors in 2012. The sharp increase in investment could cause an increase in construction costs, making new builds less attractive. Also, as this asset class becomes increasingly desirable to investors, there is always risk of scams and poorly planned projects.
Conclusions
The recent growth in commercial property is good news for the UK economy. In 2012, it contributed 3% to the UK’s total GDP and is a good indicator of economic growth. Investors realise the importance of a diversified portfolio and long-term returns – both of which can be found in the commercial property sector.