Commercial Property Investment Update 2024
High quality commercial real estate let to reputable occupiers on long-term lease arrangements can provide strong stable income returns and potential capital growth in an increasingly volatile financial market. Multi-tenant property can result in a diverse income stream with asset management opportunities and mitigate risk.
The options open to investors for the placement of their wealth has become ever more complex with not only a myriad of investment choices, but also like with property, a vast number of options, when it comes to the “wrapper” or legal structure within which the investment is purchased.
Commercial property is a solid option within any diversified investment strategy.
Over the past fifteen years since the global financial crisis the market has seen a dramatic and consistent drop-in base rates, reaching an all time low of 0.25% in 2016. Prior to the crash rates were at 5.75% in July 2007, a rate fairly similar to today.
The commercial property market saw a period of sustained stagnation during 2023 as rates rose again from 0.75% in 2022 to the base rate at the time of writing of 5.25%.
The slowdown in the market and the impact of the rate changes, shows how the market is closely linked and impacted by these changes.
One of the fundamental elements of property investment and the difference it has with other asset classes, is its ability to “gear up” utilising funding for a purchase can have a dramatic improvement on your internal rate of return and the long-term growth of your portfolio. This is also however, why investment yields are closely linked with borrowing rates.
The RICS Commercial Property Monitor Q4 2023 pointed to the market struggling for momentum, even if most of the indicators tracked in the survey have improved slightly (or turned less negative) relative to the previous report. Market activity remains subdued weighing on activity across both the investor and occupier markets, although forward-looking sentiment improves marginally. Results remain relatively downbeat away from the industrial sector, The gap between prime and secondary office rental expectations continues to widen however the largest share of respondents now feel the market has reached the bottom of the current cycle.
The headline occupier demand gauge across all sectors points to a net balance of -7% in Q4 2023. Although slightly less negative than figures of -12% and -10% seen in Q3 and Q2 respectively. When viewed at the sector level, tenant demand remains weak in both the office and retail sectors. Availability within the office and retail sectors continues to increase, accompanied by a prolonged period of rising incentive packages such as rent-free periods on offer to tenants in both sectors. Availability in the industrial sector is broadly level, although the value of incentive packages increased modestly.
On the investment side, the all-sector average metric capturing investment demand posted a net balance reading of -19% in Q4 2023, representing the fifth consecutive quarter in which this indicator has been in negative territory. This is only marginally less negative than the figure of -21% in Q3, with the office and retail sectors continuing to weigh most heavily.
Over the next year, capital values are still expected to decline across most traditional sectors. The outlook for secondary office and retail values remains firmly negative, with contributors foreseeing a modest uplift in prime office values. Secondary industrial and prime retail values are anticipated to remain relatively stable over the next twelve months, in contrast prime industrial values are anticipated to increase.
The retail sector has seen a number of changes in recent years, some led by the retailers and some by consumers. There has been a shift by retailers from on-site storage space to next day restocking, reducing the amount of space required at the stores. The growth of online retailing has also affected the traditional high street and the way consumers spend their money. The previous quarter’s survey results showed weak demand for retail space. The sector continues to see an increase in available stock, and this means a continued increase in incentives on offer from Landlords.
Prime retail rents are predicted to have stabilised, however secondary retail rents remain in negative territory. Investment market predictions for secondary capital values remain negative, with prime retail values holding broadly steady with the greatest demand and strongest prices being achieved for well and long let food store and convenience investments.
For the private investor, the current market represents, an opportunity if purchasing with cash reserves for the long term, as we see good value returning to certain assets. Or it represents a challenging time if long-term low-cost borrowing is coming to an end, you have a need to sell or are re-gearing leases off historically high rents. Either way it is essential to ensure you get the best investment advice possible on any sales or acquisitions.