2021: A YEAR OF OPPORTUNITY BUT ALSO THREATS FOR THE COMMERCIAL PROPERTY INVESTOR
Published 27 January 2021
The SWOT analysis is a longstanding business tool. Because it’s been around for so long, some people (the types always looking for the ‘next big thing’) like to portray it as a rather cliched way of looking at a situation. But as with businesses which have been around a long time, SWOT’s ongoing popularity is actually a reflection of the fact that it’s actually rather good at delivering results, time and time again.
January is an appropriate time for analysing the opportunities and threats that the coming year will bring. Obviously this analysis cannot be set in stone; who would have thought this time last year that the most enormous threat was just over the horizon? At that time it was simply another Chinese virus, like avian flu, that had carelessly reached Italy. But nevertheless, such analysis is a useful way of working out a course of action, especially if you are an investor mulling where to put your cash over the coming months.
Economic turmoil and times of significant change can spook investors, and some will sit on their cash until the situation calms down and there is more clarity about the future. But if you take the trouble to really analyse the market, times like these can be ideal for those seeking out good returns on their investment. As Warren Buffett said: ‘A climate of fear is an investor’s best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance’.
In the world of commercial property, 2021 will see opportunities and threats, and there will be winners and losers. The key to successful commercial property investment is always to have an understanding of the wider economy, and to make the connection between that and commercial property needs. Also, fundamentally you have to be ‘in it for the long term’.
Taking this view, we can start to see where the opportunities lie, and also those areas where there are threats to yields, and where the investor needs to tread carefully.
The new year is a time for optimism, so let’s look at the opportunities first. As I have said before, it’s an ill wind which blows nobody any good, and whilst the move to online shopping may be causing havoc with bricks and mortar retailers, it is driving huge demand for warehousing and distribution premises, which is the number one growth area in commercial property.
It’s not just the move to online shopping, either: Brexit has led to significant stockpiling (and with continuing chaos at our borders, this isn’t going to change any time soon), and the Covid crisis has led to medical stockpiling, too.
All of this means that there are huge opportunities for speculative developers of this kind of property. 2020 saw several such developments break ground in our part of the world, and 2021 will see this trend accelerate.
Brexit might also be one of the reasons behind a buoyant manufacturing sector. I sense a certain mindset change towards ‘manufacture your own’ self-sufficiency; rather than relying on, say, German components, businesses are realising they might have to stand on their own two feet. This is driving a healthy demand from manufacturers, as well as causing existing ones to look to expand.
Of course, manufacturing and distribution jobs have to be done in person in business premises, but not so office-based jobs. Successive lockdowns have taught us that home-working is not just possible, but can be productive and effective, too. So presumably the office market represents a threat, right?
Well, not entirely. There will be a certain rationalisation and consolidation of office space, as we have seen from Aviva just this last week. But no serious commentator is suggesting that the office is dead, or that the benefits of collaborative working and communal creativity are in any way cancelled out by the savings to be made on rent, rates and utilities by keeping the entire workforce working from their spare bedrooms; for many of us the novelty of WFH has truly worn off.
There are threats in this market, for sure. It’s unlikely that we will return to a situation where rows of desk-bound workers sit completing mundane tasks. But equally there are opportunities, principally for those who can provide high-quality, well-designed collaboration spaces which are inspirational – places where people actually want to come to work.
This means that there will continue to be a demand for high-spec, grade A office space, while lower-quality offices may struggle to find occupiers (although opportunities for creative refurbishment exists). But the extension of Permitted Development Rights are taking much of this space out of the market anyway, helping to balance supply and demand.
2021 will continue to see offices being a popular place for freehold investment, both for those seeking higher returns for their cash than is available elsewhere, and also for cash-rich occupiers buying premises large than they need, and paying for them by letting out the surplus space.
The travails of High Street retail are well-documented; Covid has accelerated a trend towards online shopping at the expense of some of our biggest retail names. Mainstream High Street retail faces some significant challenges, and whilst the High Street as a whole will still exist once the dust has settled, it will be shorter for sure.
However, destination retail still has its place, and major shopping centres such as Norwich will survive, although they may look somewhat different. However much big store chains may hope that the end of Covid will return us to where we were in March 2020, that simply is not going to happen.
So is there any future in investing in retail premises? The answer is yes, but you are going to need to know where to look and what to look for. Even in the pandemic there have been winners as well as losers: smaller, local stores have done well, as have niche independent shops. If the working from home trend does continue post-Covid, then small, local retail centres will do well.
2021’s other big area of opportunity will be specialist sectors, such as holiday homes, and also farmland. It is going to take some years before the confidence to travel widely overseas returns, and it may never get back to where it was. That means a long-lasting staycation boom, which suggests a strong area for investment. And with food security an increasing issue – and the fact that they are not making land anymore – agricultural property and farmland may also enjoy a strong market this year.
If it was ever simple to make decent returns from commercial property (and let’s face it, it probably wasn’t), it certainly won’t be in 2021. There are definitely opportunities, but to avoid the significant threats and challenges requires an intimate knowledge of the commercial property market, as well as a good understanding of the direction of the wider economy. After several years during which ‘experts’ in all fields have seen their standing undermined, the current situation shows their value more than ever, and the savvy property investor will make this they year to seek out expert advice.
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