Commercial property is set to deliver double-digit returns for investors in 2014, according to data from the IPD UK Commercial Property Index. A strong consensus of analysts and fund managers found that a lack of building projects during the recession has led to demand for office and retail space as the green shoots of recovery show.
As well as this, commercial property in the UK has had a lot of interest from overseas investors for pension funds in Asia and Europe. Just a decade ago, commercial property funds made up a large amount of investor ISA and pension portfolios, with savers viewing these assets (such as shops, industrial buildings and offices) as a safe source of regular income. While post 2007 this changed due to the recession, with commercial property falling by as much as half; it seems that this sector is now on the up.
Research shows that commercial property has generated an 8.9 percent return over the last year, which includes rental income and capital values growth and some experts predict there will be a total return of 11.5 percent for commercial property this year. Retail warehouses and shopping centres will be the main drivers up to 2017, marginally outperforming Central London offices. As well as this, the industrial sector will also see a good performance, with distribution warehouses producing strong returns for the medium term, meaning they outperform standard industrial units.
When looking at return on commercial property, it’s important to take into account both rental income and capital growth. An increase in the latter would mark a big change as capital growth has lagged behind rental income since the crisis – with last year’s coming in at around three percent. With office space becoming harder and harder to attain in London, and demand high, it’s being predicted that rental growth will only increase; while average property capital values still remain about 30 percent below the previous peak seven years ago. Predictions of increased investment and development outside of London means regional offices will see reasonable performance, with returns peaking in 2015.
As long as the current rate of capital value growth is sustained into 2014, with a rental yield of say, six percent; then it could well be realistic that commercial property will see double digit total return over the next year. This could make it among the top performing asset classes in which to invest. And with the current outlook for GDP growth increasing, there is more optimism in the air which means people could be more willing to branch out into commercial property.
However, like anything, the return you’ll get depends where your commercial property is located. Competition for buildings and rental yield is high in the centre of towns and cities such as London. In the rest of the UK, there could be problems if the local property market or economy is sluggish. The South East office market could also improve as the recovery gains traction, due to its exposure to industries such as telecommunications, media and technology and of course the proximity to London can only help!
Overall, the recent findings are welcome news for investors looking to put their money into retail property. Less risky than equities and producing higher returns than bonds, it appears there’s likely to be a scramble to commercial property across the UK capital in 2014 and beyond.
Thanks to LDG estate agents in the West End for this guest post.
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