GROUNDS FOR OPTIMISM FOR COMMERCIAL PROPERTY INVESTORS

Published 9 July 2018

warehouse wLast month I wrote about the challenging conditions facing investors in retail property, and how understanding the changing nature of that sector is vital to success.  But retail is only one part of the commercial property picture – and the latest figures suggest that industrial and office investment still offers very positive opportunities.

Largely this is driven by a situation where demand is outstripping supply in both sectors.  The latest Irwin Mitchell Powerhouse Report predicts that the Norwich economy will grow by 1.6 per cent in 2018, outperforming London, Manchester and Birmingham.  This structural economic growth means that businesses are more likely to be expanding, and so the demand for commercial space will remain healthy.

At the same time, the supply of both industrial and office space – particularly grade A quality buildings – is at a very low level, with less than seven per cent of stock vacant for both types of property.

At Arnolds Keys, we are seeing very strong demand for light industrial units, many of which are being let for warehouse and distribution usage rather than manufacturing.  This is in turn putting upward pressure on rents (and capital values), making this an attractive prospect for investors.

The lack of supply is partly down to low levels of new development over the past 20 years; the current mismatch between supply and demand may well enable such speculative building to start again, which can only be good for the wider economy. It is not just in Norwich that this demand is strong; there is a vibrant market for larger industrial units on the coast, driven by the booming offshore sector.  Overall, levels of activity in industrial property are greater in Norfolk than anywhere else in East Anglia.

There is a similar picture in the offices market, particularly in Norwich, where the stock of office space has been reduced over the past three years through conversions to residential use enabled by Permitted Development Rights. As well as removing over-supply, this trend has also improved the overall average quality of city office accommodation, as it has been mostly older and lower-grade office buildings which have been taken out of the market.

All of this is helping rents on their relentless upwards trajectory, but unlike the industrial sector, we are not yet seeing any significant move towards speculative development of new office space.  Mostly this is down to the high cost of construction of grade A offices – but as rents are driven up by the surplus of demand over supply, building quality new offices will make more sense commercially, and we could see such development kickstarted in coming years.

So good news for investors in the industrial and office sectors, even if retail is more difficult.  The over-riding point here is that all of this is dependent on the success of the wider economy driving demand for space from businesses – so that needs to be the priority for our statutory bodies.

Guy Gowing | Managing Partner

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