UK Commercial Property Set To See Strongest Returns For 25 Years

New research suggests that the commercial property market in the UK could achieve returns of over 20% for 2013. If it does it will be the greatest return our country has seen in over a quarter of a century. A report from M&G Real Estate, a global real estate fund manager, states that the performance for this year is forecast to be exceptional due to increased investor confidence and liquidity in the market. The report does indicate that long term the market will probably revert to the standard increase of between 6-8%, but despite that there couldn’t be a better time to invest in commercial property.

The UK Real Estate Market Outlook report for September 2014 shows there is a heightened confidence in the UK’s economy. Our growth is currently ahead of our closest competitors, the USA and Canada. It’s this new confidence that seems to be triggering increased occupier demand, particularly in the industrial and office markets. The demand is resulting in accelerating rental growth and lower vacancy rates.

UK Commercial Property Set To See Strongest Returns For 25 Years

The UK property market is currently attracting large amounts of interest from both UK and international investors. It’s slightly unfortunate for them that this is coming at a time when there is a low supply of stock, due to the recent restrictions that have been placed on construction. Rapid yield compression, assisted by rental growth, means average capital values have risen by 6.7% over six months to August 2014. This is according to IPD, a leading provider of real estate performance and risk analysis, providing critical business intelligence to real estate owners, managers, brokers, lenders and occupiers worldwide. Despite declining yields, investors’ risk appetite looks set to grow with property yields continuing to offer a sizeable spread above bond yields, over the rest of this year and next.

It’s worth noting, that secondary offices in the South East are outperforming prime assets at the moment, which just goes to show that prime is not always best. In fact, as risk appetite increases, secondary stock is catching up with prime assets all throughout the rest of the country. However, the better end of secondary will probably always be preferred above the weaker end.

Richard Gwilliam, head of research at M&G Real Estate said that ‘The UK economy and property market are experiencing rapid growth, leaving behind a period of difficulty that discouraged risk appetite across the board. It’s a different picture now as the weight of capital targeting the sector is showing no signs of let up’. He goes on to warn investors against being blinded by a high short term yield. He says they need to fully assess the risks to the long term income stream of an asset. In his opinion, the strongest option for investors looking for a mid to long-term rental growth is the office market surrounding London, in particular the fringe areas that benefit from infrastructure projects.

5000 square feet on the outskirts of London will set you back around £650,000, but you can expect to see a return of around £60,000 per year in rent. Whereas a similar commercial property to let in Peterborough costs around £100,000 less to buy, but the rental return is only £40,000 per annum. So based on those figures you can see that in London it will take you nearly 11 years to see a return on your investment compared to nearly 14 years in Peterborough. Not only that but of course, thereafter your return in far greater in London, so if you are able to source the extra £100,000 it is definitely worth it. But wherever you choose to buy, it seems that commercial property is an extremely sound investment for now.

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