SUPPLY AND DEMAND IMBALANCE DRIVING UP COMMERCIAL PROPERTY VALUES
Published 18 April 2019
Strong demand from both occupiers (driving growth in rental yields) and investors, coupled with a shortage of freehold investment opportunities, is driving up commercial property values in most sectors – even in parts of the retail market.
Rising rents and low interest rates are leading to more occupiers seeking to swap paying rent on a leasehold building for a commercial mortgage and ownership of their own property, and this in turn is leading to growing demand for freehold opportunities.
This trend is also being driven by the relatively (in historic terms) low costs of financing a commercial mortgage, in many cases making maintaining such loans actually cheaper than commercial rents, particularly on full repairing leases where the occupier has the same kind of responsibilities when it comes to maintenance as they would in a building they owned themselves.
With little speculative development happening in any commercial property sector across the county, the supply of suitable buildings is not growing anywhere near quickly enough to keep pace with this buoyant demand, and it is this imbalance which is seeing freehold valuations rising fast.
As well as making commercial mortgages comparatively affordable, continued low interest rates – and hence low returns on other types of investment – are also attracting new investors to the commercial property market, with a particular rise in those placing such investments in Self-Invested Pension Plans (SIPPs).
All of this is creating real competition to purchase freeholds when they come onto the market, with the result that capital values are rising – which in turn attracts even more investors into the market.
We have seen strong demand in the office and industrial sectors for some time, but we are seeing good rental yields and rising property values even in the retail sector. Whilst the problems of major national retailers are well documented, there are plenty of local pockets of retail strength, such as The Lanes in Norwich.
Savvy investors who are prepared to do their homework and find the right retail property in the right area, and crucially with the right covenants, are realising that bleak media stories about retail property values are not representative of the picture at a detailed, local level.
Of course, we can’t ignore the elephant in the room that is Brexit. Although the current uncertainty doesn’t seem to be dampening the market for freehold commercial property investment – there is a sense of just needing to get on with business after all this time - if we do end up crashing out of the EU without a deal, we have no way of knowing what the effects will be.
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