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RICS: Rising investment demand in UK commercial property higher than before pandemic

Property experts have seen positive movements in investment trends across commercial property during Q4, while owners continue to diversify the way we use office space, the latest RICS Global Commercial Property Monitor has found.

Across all sectors, investment enquiries rose for the fourth successive quarter, leading to capital value expectations rising for the year ahead. The strength of the industrial sector continues to standout, with a net balance of +84% of respondents expecting prime industrial values to increase over the next twelve months. The outlook is also positive for prime office values, as a net balance of +24% of respondents foresee an increase during 2022 (the strongest reading since Q4 2019).

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Looking at the alternative sectors, over 50% of respondents project an uplift in capital value expectations for data centres, multifamily residential and aged care facilities, respectively.

As almost two-fifths of respondents (+39%) believe the market to be in the early phase of an upturn, despite some impact from the latest Covid wave, respondents are more optimistic about the future of the UK commercial property, with owners in the office sector looking at how to attract employees and occupiers back.

As Covid restrictions lifted across the UK last week, 66% of respondents still believe an office is essential for a company to successfully operate. However, 76% of contributors report that they are seeing an increase in demand for more flexible and local workspaces and over two thirds (69%) have reported an increase in space allocation per desk following the pandemic; all highlighting how occupiers are making the office place safe and attractive for employees once more.

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But traditional set ups are changing as 87% of respondents are seeing a re-purposing of office space, with 15% highlighting that this is happening in significant volumes.

Interestingly as UK office space looks to be repurposed, investment enquiries from the UK and overseas slightly increased this quarter.

Growth across the industrial sector continues to intensify with availability of units failing to keep up with demand. This quarter, 61% of respondents saw an increase in the number of enquiries for industrial units whilst -43% reported a decline in availability. This imbalance means that almost two-thirds of respondents anticipate industrial rents rising in the coming three months. Industrials are also the only sector anticipated to see any significant rental and capital value growth over the coming 12 months too.

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The retail sector continues to experience a drop in occupier demand. Whilst investment enquiries also slipped this quarter with -16% of respondents reporting a fall in domestic enquiries and -17% reporting a fall in foreign investment enquiries, this continued negative trend is less pronounced than in 2020. 32% of respondents report that capital value expectations for the year ahead didn’t change in Q4 (in net balance terms). Despite this negative reading the momentum has significantly improved from the onset of the pandemic when 86% of respondents expected them to fall.

Tarrant Parsons, RICS economist, said: “Strength across the UK industrial/logistics market shows no sign of abating, with capital value expectations for the year ahead posting a fresh all-time high across the sector during Q4. Generally speaking, sentiment appears to have largely weathered the uncertainty brought on by the rapid spread of the Omicron variant in recent weeks, although the green shoots of recovery that appeared to be emerging in office tenant demand seem to have been put on hold for now.

“Longer term though, a strong majority of respondents still consider office space in some form to be essential for businesses to operate successfully. That said, it appears more flexible or local spaces are very much in favour which could well prove to be a lasting legacy of the pandemic.”

Source: Scottish Construction Now

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Commercial property trounces residential for rental yields

Commercial property offers significantly higher yields than residential, though the latter is far more popular with investors, analysis by London lettings and estate agent Benham and Reeves has found.

Across the UK commercial property investment offers average annual yields of 10.7%, compared to just 3.4% for residential.

The best commercial property yields are found in Scotland (20.4%), the South West (13.7%) and Yorkshire and the Humber (12.9%), with the best residential yields being in Scotland (4.4%) and the North West (4.3%).

When it comes to the initial cost of investing, the average residential property requires a lower budget of £259,850. With an average value of £454,384, a commercial investment requires a budget 75% larger.

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Marc von Grundherr, director of Benham and Reeves, said: “It’s fair to say that both the residential and commercial markets have been impacted by the pandemic and so it’s hard for investors to know where to put their money at present. But tough times can also bring great opportunity and with the country now reopening from both a professional and social standpoint, both sectors are set to see a return to health over the coming months.

“There are a plethora of factors to consider from your initial investment level, which sector to choose and the ongoing requirements, capital gains potential, as well as the regional disparities across these sectors in each region of the UK.

“While a commercial investment may offer a higher yield, the recovery timeline as a result of the pandemic is set to stretch on far longer than that of the residential rental market and residential property investment remains by far the dominant force where availability, affordability and total sector value is concerned.

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“However, commercial investment can provide a more hands-off approach for those doing so through a third-party platform, while the amateur buy-to-let landlord is sure to spend more time sorting out tenant issues and so on.

“The best approach is a balanced portfolio and one that considers the pros and cons of each market from both a residential and commercial standpoint.”

Despite the gap between the returns offered for residential and commercial, the residential market is far bigger, with 541,966 listings versus just 12,022 across the commercial space.

The value is also higher, worth an estimated £251.5bn, while the commercial market comes in at almost £9bn in value.

Source: Property Industry Eye

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Scottish commercial property investment up a third

Investment in Scottish commercial property increased by more than one-third (35%) compared to the same period last year during the first six months of 2021 as the market continued its recovery from the pandemic, according to analysis from Knight Frank.

The independent commercial property consultancy found there were £688 million worth of deals between January and June 2021, compared to £510 million during the first half of 2020 – the height of the UK’s first lockdown.

Investment fell marginally between the first and second quarters of 2021, from £371 million to £317 million (15%). However, this does not include deals with undisclosed values, such as the sale of Neptune Energy’s Aberdeen headquarters in May – the biggest investment deal in the city since the pandemic began.

Overseas investors have remained the biggest buyers of Scottish commercial property so far in 2021, making acquisitions totalling more than £300 million. Privately held property companies were involved in £115 million of deals, while UK institutions accounted for another £60 million.

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Alternatives and mixed-use schemes were the most popular asset classes in terms of investment volumes – including the £80 million of funding for Moda’s Holland Park build-to-rent development in Glasgow – followed by offices and industrials. Knight Frank predicted that, with a range of high-quality stock still being marketed, a flurry of deals could complete after the summer.

Alasdair Steele, head of Scotland commercial at Knight Frank, said: “Scotland’s commercial property investment market is still recovering from the effects of the pandemic, but there are signs we are heading in the right direction as the economy re-opens. The biggest investment transaction in Aberdeen since the pandemic began is indicative of the fact that significant deals are beginning to conclude and, all things being equal, we should see more after the summer break.

“While alternatives and mixed-use schemes has been an active sector over the past year or so – particularly in the build-to-rent market – another notable trend has been the hardening of yields for retail warehousing. With more investors looking for exposure to these assets, we expect the trend for good quality retail warehousing to continue, while offices should gain momentum in the second half of the year as the occupier market recovers and overseas inspections are allowed once again.

“There is a great deal of interest in what Scotland has to offer, with comparatively strong fundamentals. Commercial property remains an attractive source of secure long-term income, which is still a precious commodity for investors.”

By Brian Donnelly

Source: Herald Scotland

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UK Commercial Property confident after a tough year

UK Commercial Property reported a year-end net asset value of £1.1bn in its final results on Friday, representing a negative total net asset value return in the year of -0.9%, as valuations came under pressure amid the Covid-19 pandemic.

The FTSE 250 real estate investment trust noted that over the longer term, it had delivered a 10-year net asset value total return of 85.6%, compared to the Association of Investment Companies (AIC) peer group’s 32.4%.

It reported EPRA earnings per share of 2.71p for the year ended 31 December, down from 3.50p year-on-year, as earnings were impacted by bad debt provisions and sales made in the year, resulting in reduced income.

The company’s total share price return was negative at -19.7%, swinging from a positive return of 11.3% in 2019, as the share prices of most diversified real estate investment trusts fell due to negative sentiment associated with the coronavirus crisis.

As at year-end on 31 December, the company’s discount to the last published net asset value was 16.7%, which the board said was in line with other diversified REITs.

The company said its net gearing was low at 6.4%, compared to 14.7% a year earlier, which it said remained one of the lowest in its peer group and the wider REIT sector, with the AIC sector average standing at 31%.

Its financial resources stood at £218m at year-end, up from £130m year-on-year, which was further boosted by sales in the first quarter of 2021, resulting in it having £276m to invest into its portfolio and enhance earnings.

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In order to comply with the REIT rules, the board announced that shareholders would also receive a further interim dividend for 2020 of 0.531p, which would be paid on 21 May to shareholders on the register as at 7 May.

Looking at its portfolio, UK Commercial Property said it produced a positive total return of 1.1% for the year, down from 1.4% in the prior year but still “significantly outperforming” the -0.9% from the MSCI benchmark, as its portfolio weightings provided a tail wind to relative performance.

Rent collection stood at 83% for the year, compared to the 77% it reported at the half-year and 97% for the whole of 2019, as rent collection rates continued to increase as the year progressed.

It made £74m of acquisitions during 2020, with funding of two student accommodation assets in Exeter and Edinburgh as well as the acquisition of an Asda store in Torquay.

The board said those assets would generate secure income as it built a “modern economy portfolio”.

UK Commercial Propety’s occupancy rate improved to 93.5% from 92.1% over the year, despite the pandemic, as successful letting activity – particularly at XDock 77 in Lutterworth – resulted in higher occupancy levels.

The board said that also compared favourably to the MSCI benchmark occupancy rate of 92.6%.

Its industrial weighting was 58%, compared to the benchmark of 30%, and its retail weighting stood at 17%, compared to the benchmark of 25%.

The board said the company’s portfolio was “well-aligned” to an industrial sector that was forecast to outperform, and underweight to the retail sector as a result of several sales in the year.

“A key focus over the past year has been to work in partnership with our tenants to find mutually acceptable solutions to rent collection and I am pleased that UKCM, with its strong focus on environmental, social and governance (ESG) matters, has managed to do this with our occupiers across the portfolio,” said chairman Ken McCullagh.

“We have maintained dividend payments and we see potential for dividend growth in the short to medium term.

“There has also been good progress in selling assets in line with our strategy, further and selectively reducing retail exposure, and investing in assets fit for a diversified modern economy portfolio with an intentionally strong weighting to the industrial and logistics market.”

McCullagh said the last year had resulted in “profound changes” to the way businesses operate, and how individuals live their lives.

“Although there is much speculation over the future of the office sector, for example, as businesses adjust to hybrid working practices, UKCM is in a strong position and the success of the vaccine rollout thus far should provide confidence that businesses can reopen and rebuild.

“The portfolio that has been put in place over the last few years has enabled the company to weather the current difficult situation and emerge in a position of relative strength to create additional value in the future.”

At 0902 BST, shares in UK Commercial Property REIT were down 0.55% at 75.68p.

Source: ShareCast

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There’s still plenty of potential for investors in commercial property

Jitters over the outlook for the commercial property sector are overdone, says Max King. Investors should consider this Europe-focused real-estate investment trust.

Amid the sweeping prophecies that life will never be the same post-pandemic, it is refreshing to hear a more cautious view. “I am a slight sceptic of the widespread assumption of ‘a new normal’,” says Mat Oakley, head of pan-European commercial property research at Savills. “We see such forecasts in every crisis; change will happen more slowly.”

“Commercial property is a simple asset class,” he says. “In an expansion, we need more space. Currently, we are in a thumping great recession, but I expect a not-quite V-shaped recovery in which GDP recovers quickly but unemployment doesn’t return to 2019 levels for five years.”

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Property investment, now past the nadir, was 43% below the five-year average in the first half of 2020. But it was 51% down in 2008 and “the recovery will be better this time”. In the office market, vacancy rates are rising, there is downward pressure on rents and development starts are being delayed, but “we are not at the end of the cycle: the medium-term fundamentals remain good”. Less development will reduce vacancy rates and the pressure on rents.

What about the shift to working from home? Oakley points out that home-working is suitable for some tasks (reading documents, focused work and video or phone calls), but “a lot of things work better in an office so offices won’t disappear”. Offices are better suited to team management, meetings and the informal chats or chance encounters that can spark fruitful new ideas and strategies for the company, a key factor in services and creative businesses. Surveys show a marked swing in favour of working from home, but from one day a week or less to two or three days a week – not to full-time.

Retail parks have been more defensive than shopping centres, with weekly footfall down 20% rather than 60%. Retail parks are well suited to “click and collect” services and returns, while they also offer social distancing. In the industrial market, the take-up of logistics space in the first half was the highest for 15 years, but this type of property “is not as safe as it seems”. When vacancy rates rise above 12%, as they did in 2009, rents fall.

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Marcus Phayre-Mudge, manager of TR Property Investment Trust (LSE: TRY), is not ready to buy into the UK yet. Only 28% of his portfolio is invested in listed British shares; another 7% in directly held properties and 64% in continental shares. Of the latter, 45% is in Germany and Austria and nearly all the rest in France, Benelux and Scandinavia. He is cautious about Britain because since December 2015 European property shares have returned 45% in sterling, but British ones -20%.

Within the UK, favoured areas are “beds, meds and sheds”: student accommodation, healthcare property and self-storage, companies that are UK-listed but have their assets in Europe and two specialist real estate investment trusts (Reits), Supermarket Income and Secure Income. Student accommodation and Secure Income, owning hotels and leisure attractions, have been poor performers. Progress on the directly held properties may open the way to asset disposals.

Though the share price is down 32% since February, its European focus means that performance is far ahead of the UK property sector over three and five years. The shares yield over 4%, trade on an attractive 13% discount to net asset value and, with a market value over £1bn, are highly liquid. Phayre-Mudge is positive: demand from tenants, “excluding non-food retail, should prove stable while a lack of supply, due to the absence of a development cycle in 2008-2014 and the current development cycle being deferred, means that there is no surplus of new space to undermine rents… Real estate, particularly where income is long and strong, will be an attractive investment”.

By Max King

Source: Money Week

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2020 will be ‘year of opportunity’ for north’s commercial property market

THE north’s commercial property market ended the year with a much needed boost with the sales of Sprucefield retail park in Lisburn by Intu and Crescent Link Retail in Derry by the Lotus Group.

The combined value of these deals, at £70 million, brought the total value of commercial property investments in Northern Ireland for 2019 to just over £210m.

Property investment at this level is a considerable improvement on levels seen in 2018 at £165m, though there is a long way to go to reach the five-year average at just over £300m a year.

The subdued level of investment in 2019 is not surprising given the uncertainty around Brexit over the last few years, and we would expect investment levels to bounce back strongly this year given the strong mandate the Conservative Party received in the recent general election and the relatively stable macro-economic outlook

The office sector again performed strongly in 2019 with take up of 517,000 sq ft, well ahead of the five year average. Significant deals throughout the year included the signing of leases by Deloitte for 80,000 sq ft in the Ewart Building on Bedford Street, PwC taking the remaining 46,000 sq ft in Merchant Square and the letting by Kilmona of the entirety of Chichester House on Chichester Street to Rapid 7.

The outlook for 2020 for the office sector also looks strong with stated requirements in the market in excess of 400,000 sq ft including the NI Civil Service Requirement for 161,500 sq ft and the as yet unsatisfied Citi requirement for 120,000 sq ft.

Available prime office stock is as usual fairly limited though buildings including The Sixth, Paper Exchange and The Mercantile all in prime locations could be brought on stream this year subject to suitable pre lets.

Trends in the office occupier market are set to continue with co working/serviced office providers predicted to continue their significant expansion throughout the UK.

Technology is as ever set to change the way we work though it is unlikely to affect the demand for office space in the short to medium term as office workers need to interact with each other in an easily accessible work enhancing environment.

The continuing challenges in the retail market will create opportunities both for successful retailers to relocate to better position and for investors who are prepared to look at the sector. There will be undoubtedly be a need for alternative uses for retail space in both suburban shopping centres and retail parks but also in our towns and cities given that the prime retail areas are becoming smaller.

In order for our bricks and mortar retailers to successfully continue to compete with the steady advance of the internet, our government will have to look at the level of rates charged to retailers and work out a way to balance the playing field with their internet competitors. though where this sits on the level of government priorities remains to be seen.

On balance, the outlook for 2020 is a positive one and we look forward to the challenges that the year ahead will bring.

By Declan Flynn

Source: Irish News

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London’s commercial property market bounces back in fourth quarter

Investment in London’s commercial property market rebounded in the fourth quarter as the capital’s risk profile began to improve, strengthened by Boris Johnson securing a majority in last week’s General Election.

Investment jumped 15 per cent compared to the previous quarter, rising to almost £2.8bn, according to preliminary figures.

Property experts at estate agents Knight Frank have forecast that the boom will continue next year, driven by the result of the General Election and the increased certainty surrounding Brexit going forward.

Knight Frank head of capital markets Nick Braybrook said: “Investors have been circling the market in increasing numbers over the last few months, with international capital drawn in by attractive yields and the currency discount compared to other global cities.

“London’s perceived risk profile has improved tremendously through the second half of 2019 whilst geopolitical tensions in markets from Asia to the Middle East have eroded their relative attractiveness boosting the appeal of London.”

Faisal Durrani, head of London commercial research added: “The political uncertainty certainly dampened activity for most of 2019, but a shortage of assets for sale exacerbated this.

“With the decisive Conservative majority secured in the General Election last week, confidence is expected to rapidly return into the market, something investors have been hankering for.”

Figures published by CBRE earlier this week also painted a positive picture for London’s commercial property market.

The data showed that central London office take-up soared 31 per cent between October and November, driven by a growth in the capital’s fintech sector.

Office take-up jumped to 900,000 sq ft, while the year on year increase was five per cent.

By Jessica Clark

Source: City AM

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Scotland’s commercial property market outgunning rest of UK

Scotland’s commercial property market is holding up better than the rest of the UK despite being buffeted by Brexit uncertainty, new research suggests.

Total investment volume for the first nine months of 2019 was down by 12 per cent year-on-year in Scotland, according to new figures from Colliers International, the property adviser. That compares with a fall of 26 per cent for the whole of the UK.

Property experts from the firm said the cooling economy and uncertainty over Brexit and the global outlook had caused investors to adopt a more cautious approach.

Douglas McPhail, head of Colliers International in Scotland, said that investment in Scottish property totalled some £717 million in the third quarter, marking an 18-month high and compared with £347m in Q1 and £619m in Q2.

He noted: “Although investment volumes during the first nine months of the year are down by 12 per cent compared to the same period in 2018, it is very likely that activity will break through the £2 billion mark for the sixth year running.”

Middle East

McPhail added that the proportion of international money flowing into Scottish property saw an upturn in the third quarter, with particularly strong interest from Middle Eastern (£182m) and US (£160m) investors.

Scotland’s relative outperformance comes despite a greater reliance on overseas investors, who account for around 55 per cent of Scottish investment and 43 per cent of UK investment.

Patrick Ford, director of Capital Markets at Colliers International in Glasgow, said: “By city, Glasgow was the star performer, attracting £278m of capital, closely followed by Edinburgh at £226m.

“The largest deal of the quarter was Hines Global Income Trust’s purchase of the ‘true Glasgow West End’, a 607-bed operational student asset, traded for £72m. This was followed by Ashby Capital’s acquisition of Abbotsinch Retail Park in Paisley for £67m. Completing the top three deals is Arbah Capital’s purchase of Glasgow’s Sauchiehall Building – a leisure and retail mixed-use asset – for £55m.”

These deals mean that Glasgow’s strong office market is expected to bypass the five-year average of 700,000 square feet by the end of 2019.

Ford added: “Demand for space remains healthy and a lack of stock will continue to exert upward pressure on rents. In Edinburgh, the office market is characterised by lack of existing stock. A number of significant requirements cannot be met by existing supply and are likely to result in pre-lets.”

In Aberdeen, Q3 saw the largest office deal in three years with the letting of 51,356 sq ft at Aberdeen International Business Park to Oceaneering.


Source: Scotsman

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Demand for commercial property at lowest level since 2012, says industry report

Demand for office space in the South West has slipped to its lowest reading since September 2012, the Royal Institute of Chartered Surveyors’ UK Commercial Market Survey has revealed.

The survey added that the current impasse over Brexit is contributing to perceptions that the South West commercial property market is in the downturn phase of the property cycle.

The RICS report for Q3 2019 said that enquiries from investors are down at headline level and that 53 per cent of respondents believe that the market to be on a downward trajectory.

Occupier demand in the South West fell at the headline level once again, with the net balance slipping to -19 per cent, the lowest reading since June 2012.

Once again, the retail sector continues to drive the overall decline (net balance -62 per cent, compared to -54% in Q2).

However, demand for South West office space also fell during Q3, with a net balance of -8 per cent compared to -1 per cent in Q2.

Demand for industrial space has a net balance in the region of +12 per cent.

The region’s retail sector continues to have large numbers of vacancies coming to market, prompting another increase in incentive packages on offer to prospective tenants.

Inducements are also on offer in the office sector with 17 per cent of respondents reporting a rise in the packages.

South West respondents to the survey project that rents for the coming three months are expected to rise in the industrial sector, the only sector to see any notable interest from tenants.

Unsurprisingly, the retail sector isn’t expected to improve, some 63 per cent of respondents in the region expect to see further reductions in rents across the market.

Across the UK, retail rents are reading at the lowest level since the financial crisis (Q1 2009).

Looking further ahead, local respondents expect prime and secondary retail rents to fall for the year ahead.

The outlook has turned negative for secondary office rents in the South West, driven by weakening expectations in London.

By way of contrast, the industrial sector continues to return rental growth projections for the coming 12 months in the region.

Interest in investing in the local commercial property market fell again this quarter, with -5 per cent more South West respondents seeing a fall in investment enquiries.

Overseas investment demand also declined across the sectors with a net balance of -9 per cent of respondents seeing a fall.

Tarrant Parsons, RICS Economist, said: “Although a clear majority of respondents now perceive the market to be in a downturn, the fact that capital value expectations are still positive in many parts of the country suggests a relatively soft landing for the commercial real estate sector is anticipated overall.

“That said, the fallout for retail is altogether more severe. It remains to be seen what impact the latest Brexit developments have on confidence across the sector, but with the picture unlikely to become clear until into the New Year it may well mean hesitation continues over the near term.”

Martin Smalley of Gleeds in Bristol added: “Brexit unsurprisingly has created an atmosphere of uncertainty in the regions.

“There are however hotspots around areas of significant infrastructure investment like Hinckley Point C which is fuelling growth across the commercial, retail, industrial and residential sectors.”

By James Young

Source: Punchline Gloucester

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Commercial property: Build-to-rent is a growing family affair

Research by the Institute of Fiscal Studies suggests that owning their own homes is no longer a priority for younger generations, particularly those in the 25-to-34-year-old bracket.

But renting is not just for singles or couples. Families are increasingly turning to the private rental sector, with a five per cent rise in Scotland over the last last year and three and four-bedroomed houses generating the steepest growth in rent.

This is where build-to-rent (BTR) comes in – homes which are built to a high standard specifically for the long-term rental market.

Up until now, BTR developments have captured a completely different market, but if it continues to deliver only for young professionals it will not achieve its full potential.

Families who cannot afford to buy their own homes are looking for security and are much more likely to settle for longer periods, providing a steady income stream for large-scale investors.

This is ideal for BTR developers who offer greater security to renters, with specialist operators rather than local factors managing accommodation.

On the regulatory side, there have been some notable moves in the last few years to support the case for family-friendly BTR.

Local authorities were given the power to create Rent Pressure Zones (RPZ) in December 2017, capping rent growth at four per cent per annum in areas where rents were at risk of overheating.

This is particularly important for Scotland’s cities showing strong growth – including Edinburgh – with population growth forecasted at 7.7 per cent by 2026.

Perversely, by smoothing out the inflation and deflation cycle, RPZ provides greater levels of security for tenants and specialist landlords relying on a long-term investment.

The balance of risk between tenant and landlord has also shifted, with all leases in Scotland now based on a lifelong security of tenure.

Landlords can no longer terminate a lease on “no fault” grounds. Again, specialist landlords see this as underpinning the case for providing suitable and family-appropriate private rental accommodation.

Developers and investors should also take heart in the fact that a tax incentive, whereby six or more dwellings can be treated as non-residential thus exempting them from LBTT, is now in force.

This, coupled with economies of scale and efficacious modern methods of construction, is strengthening the business case for BTR in Scotland.

Some 6,300 BTR units are currently at various stages in the planning process, with developments such as Candleriggs Court in Glasgow and Lochrin Quay in Edinburgh, already complete.

A successful and inclusive BTR sector in Scotland is a win-win-win for policy makers and the Scottish Government, which is keen to meet ambitious housing targets; for developers and investors, who are seeking to capitalise on the growing demand for larger private rental accommodation, and especially for the growing family of Scotland’s renters.


Source: Scotsman