Commercial investment market: Horizon gazing post-Brexit
Rob Lankey (pictured) is commercial investment director, Shawbrook Bank
In these times of heightened political and economic upheaval, only the very brave would dare to make predictions on the commercial investment property market, but I am going to give it go!
At the time of writing this piece, ‘Brexit day’ is now history and property investors have stopped kicking tyres.
There has already been a noticeable uptick in decisiveness and activity. Getting an early predication in, will this continue? Absolutely yes, and I’m of the opinion that it will trend upwards.
When you consider what drives the investor’s decision to invest in commercial property, feeling confident and minimising uncertainty is fundamental.
And it is uncertainty that has made the commercial market hesitant, at best, for well over 12 months now.
The commercial investment market has seen a reduction in the number of transactions over the last 12 months, but my second prediction is that 2020 will be the year activity will accelerate again following the decisive General Election result and Brexit day now being behind us.
In 2019, only 35-40% of all commercial investment transactions were purchases (the rest were refinances and capital raising).
Transaction volumes have also fallen and are below long-term averages, but all that said, the sector remains resilient, and still offers good opportunities to the medium to long-term investor.
What makes the UK commercial investment market interesting? Firstly, the fundamentals of the commercial investment market are changing.
There was once a time where the dominant three segments of the market were industrial property, followed by offices and retail.
However, coming strongly along the side rail is the Occupational Real Estate market, sometimes called the ‘Alternatives’ sector.
Now, it is fair to say that some of its advancement to third place has been helped by the shrinkage of the retail sector.
Since the EU referendum, the performance of retail, office and industrial assets has shown some considerable divergence.
For retail properties, several factors have come together to create a ‘perfect storm’.
On the back of a decade of very low real wage growth, consumers have turned away from the high street and increasingly do their shopping online.
In anticipation of Brexit, they have also reigned in the borrowing habits which will weigh on consumer expenditure going forward.
This in turn has had a detrimental effect on capital value growth for assets in this category.
But the growth of the alternatives market has been outstanding nonetheless and prediction three is that this will continue.
This sector has developed from being only 5% of market activity in 2008, to 40% in 2019.
What has driven this growth is falling lease lengths in traditional mainstream assets driving purchasers to seek out alternative sustained income streams.
Also, competitive yields have increased the appeal of alternatives which is now an established feature of the mainstream property market.
Within this heading are: hotels, student living, residential health care, data centres, self-storage, car parks, pubs, leisure, such as gyms and cinemas, petroleum and automotive.
The second thing that makes the commercial investment market particularly interesting is commercial property is not highly correlated with several other asset classes and, therefore, it is a compelling area for investors looking to diversify their portfolio.
It may particularly appeal to BTL investors impacted by recent regulatory and tax changes.
There is a school of thought which asks, why go into, or indeed stay in, BTL when the investor could achieve similar returns from their armchair investing in the FSTE 100, particularly when positioned inside an ISA.
In addition to the challenge from shares, the commercial property market offers great diversity.
Of course, if full commercial property is too much for some, there’s a wide range of semi-commercial properties which can provide good investments.
Commercial returns have not been too shabby either.
Over the past 18 years, the commercial property market has returned 308% to investors compared to 209% for the FTSE100, and yields have remained stable.
Average yields across the commercial property sector have stood nearly unchanged at c.5% since 2015.
So, in the light of all this, prediction number four is that many more first-time landlords will emerge wanting to transact in the commercial investment space.
Four predictions then, all pointing to what should be a bumper year in commercial investment activity for borrowers, brokers and lenders alike.