INVESTORS NEED TO THINK OUTSIDE THE BOX
Published 1 April 2019
Strong demand for investment in commercial property means that investors are having to start thinking outside the box – both in terms of looking at different sectors and accepting slightly lower initial yields in the short term with the prospect of rental or capital growth in the future.
Inevitably a strong market forces up prices, with competition not only from local investors but those widening their search areas to secure good investments. We are seeing this across most parts of the commercial property market, but investors shouldn’t be downhearted, mainly because that buoyancy is driven by strong occupier demand leading to rental growth and hence increased returns in the medium term.
It is also being caused by a lack of supply in the market, and with speculative construction still at a low rate, that is a situation which is unlikely to alter any time soon.
What it does mean is that investors coming into the market with too fixed an idea of what they want to buy are more likely to be disappointed, as they will face stiff competition from other buyers.
In particular demand are industrial properties, especially those with occupiers with five or more years left on a lease with strong covenants, as well as grade A quality office buildings.
Despite the many headlines given over to the woes of the High Street, some retail sectors such as supermarkets, convenience stores and discount shops are doing well. One retail investment is being marketed (not in Norfolk), occupied by a discount supermarket with 16 years left of a 25 year lease, offering an initial yield of 7.5 per cent, with fixed rental increases every five years. No wonder investors are falling over themselves to snap up such properties.
The result is too many investors chasing too few properties, which means flexibility and creative thinking is called for. There are many other types of commercial properties which the majority of investors don’t consider: medical, educational, hotels and leisure, to name a few. It may also be time to consider casting the net wider into Norfolk towns and villages.
For example, we have recently been instructed on a freehold school investment, comprising a Grade II listed hall near Bungay which is occupied by a high quality specialist school provider. The property is let on a full repairing and insuring lease until 2032. The guide price, allowing for purchasers costs, provides a net initial yield of 7.7 per cent, with a rent review due in 2022.
It is the quality of such a lease, coupled with the prospects for rent growth, which really makes these investments worth considering. In this case the initial yield is very good, but with demand for freehold so high, it may be that investors need to adjust their immediate rental yield expectations and instead look to future potential yields for an indication of true value.
A strong investment market might be expected to knock yields, but if investors are prepared to think outside the box, there are still attractive returns and opportunities.
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