UK Commercial Property

Recent modest falls in UK commercial property are due to the rise in interest rates over the last year. This came after a long period of rising commercial property prices caused by falling property yields. As property yields fell and interest rates rose commercial property sales became harder to finance. Another reason for the falls is the credit crunch that has been in effect this summer. It is still not sure what impact this may have on UK economy but it has caused a slowdown of property transactions plus a stopping of large property developments in the City of London.

Valuers are likely to remain cautious whilst the credit crunch still has an impact on the market.

It looks as though there will not be large negative returns from high quality modern commercial property because the UK has employment figures and inflation is only 2%.

It is likely that over the next twelve months returns for commercial property will be slow with valuations supported by rental income and growth.

Although short-term returns may be disappointing it is thought that UK commercial property will continue to do well because of strong diversities and income qualities over the long term.

Cutting Corners

It has come to light that 10% of commercial sales are not using the proper commercial property searches thereby making the liability insurance invalid. It appears that some conveyancers are only using residential searches that do not cover all that is required for commercial property.

Two reasons are given for this one, that corners are just being cut as residential searches are cheaper than commercial searches and the is that correct solicitors are not being sought. Solicitors in these cases are not familiar with commercial property and do not ask for the correct searches.

Office Properties

Office rentals have grown and pushed up property yields by 0.4% this year.

Equities returned 12.2% in the twelve months to September 2007 but property returns was 7.2%. Property equity returned –12% and bonds at 1.2% for the same period.

For the same period total investment volumes were 40.8bn lower than 2006. In the first nine months of 2007 overseas investors were the only major positive contributor.

In September the total return for property was 3.4% and offices were the best performers with a return of 7% ahead of industrial at 2.7% and retail at 1.2%.

The office sector has benefited better resulting in capital growth of 3.3%, rental growths were 2.2% and industrial 1.4%.

Equity yields rose to 5.6% in September this was in effect a 16 basis point increase over the past three months. During September rental values grew 0.4% but capital values benefit was offset by yield increases.

Commercial Property Investment Returns

Commercial Property as an asset class has seen good returns in recent years. According to RICS the total

Commercial Property returns have been as follows:-

6.9% in 2001
9.6% in 2002
10.9% in 2003
18.3% in 2004
19.1% in 2005
The Commercial Property Investor continues to be resilient despite rises in the cost of borrowing (interest rates). It is the stronger UK economy that has supported business expansion and upheld demand for both the investor and the business owner who holds and occupies commercial property. In particular, office occupier commercial mortgages have been in big demand in central London. Both office and industrial owner-occupier properties have been strengthening in Northern England. Retail premise demand has been weakening throughout the UK.

The RICS UK commercial property forecast highlighted that investment wasn’t just organic; to the contrary, overseas investors had been the dominant force in 2005.

UK Real Estate Investment Trusts (REITs) and Self Invested Personal Pensions (SIPPS) continue to add tax advantages for investing in commercial property.

RICS Commercial Property figures:-
Owner occupier commercial property increased from 2.6% to 3.6%.

Commercial property a "solid" buy-to-let investment

Commercial property could appeal to an investor who is looking for a safe choice, it has been suggested.

Peter Hemple, deputy editor of Property Investor News, said that commercial property offers "hands-off investment" and long-term possibilities for those who want to avoid the hassles of residential buy-to-let.

"If you're looking for a solid tenant then you can't really get more solid than Barclay's bank, or Marks and Spencer's, or that sort of thing," he remarked.

"That appeals to the kind of investor who doesn't want to be going round to a flat every nine months looking at maintenance, trying to find tenants."

Landlords should think carefully about what type of business they rent to, he added.

A larger and more well-established firm is preferable to a start-up or other small business which may not have the same prospects or staying power, according to Mr Hemple.

He also recommended that retail is the cheapest way to begin in commercial property investment.

As a general rule, he said: "Retail tends to be cheaper than offices and offices will be cheaper than industrial sites. But it can vary."

In related news, the Confederation of British Industry recently said that tenant demand for commercial property in the UK is set to rise.

Auctioned properties 'attract buy-to-let investor'

Buy-to-let investors are the primary buyers of auctioned homes for refurbishment, the head of property auctions at Savills said today.

James Cannon commented that there is "a lot of demand" for properties from landlords who want to add to their portfolios.

He explained that second-hand properties often need a good amount of work to be done before they are ready to be lived in, but that auctioneers "don't find that generally causes a problem" for landlords.

"The properties … will need some refurbishment, but having said that, people quite like that because they can go in there and make it their home … by doing all the work on the property."

He added that many people who have been successful with residential property tend to move into commercial investment.

"With residential, obviously the landlord has the problem of managing the property and looking after it. People tend, as they get more money, to actually want to do commercial."

However, Mr Cannon cautioned that the market for commercial property is "cooling off slightly" compared with last year.

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