State of the nation: How is the commercial property sector doing?

For investors looking to dip their toe into the commercial sector, you could not have picked a better time. With rising yields, diverse city stock and interest from overseas buyers, the sector is leading the way for economic recovery.

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Since 2008, when the global financial crisis hit, property values have fallen as much as 40 per cent, causing confidence to be diminished within the market by potential buyers and sellers. However, over the past 12 months, there have been great signs of recovery, with investors more inclined to take on commercial property than retail forms, the latter of which is still flagging when it comes to yield levels. So what’s the situation?

Central London remains the way to go
If there’s one area leading this success, naturally it’s the capital city. The first six months of 2013 have proven that the West End continues to be a hotspot for both domestic and foreign investors, with small and medium enterprises (SMEs) looking to establish themselves in the capital. In the last year alone, acquisitions in the region totalled £22.9 million.

In a statement, FTSE 250 property firm Shaftesbury said: “London continues to attract unprecedented levels of interest from across the world from businesses choosing to locate and invest here, from visitors seeking to experience its unrivalled variety of attractions and from those who live and work here.”

However, this positive news goes beyond just London. Commercial property rents are rising at a dramatic pace regionally, according to CBRE’s UK Q2 2013 survey. The recent report highlighted that property rents had increased across the UK by 0.7 per cent in the second quarter of the year, with the prime office market leading the way with a 1.7 per cent increase in rental values. The ‘boom effect’ has spread so far that no regional offices outside of London recorded any drops in rental values. If anything, the south-east of England came in second regionally for healthy growth.

Aleksandra Starczynska, analyst at CBRE research, said: “These results show that a more widespread recovery in the UK property market is starting to become apparent. This more positive trend in the UK real estate sector is in line with what is also being reported in the economy generally, through business surveys and other data.”

A mixed picture
However, it is still clear that we are not out of the woods just yet. Investors are welcome to enter the market but they should do so with knowledge behind them to make sure their long-term decision is the right one.

Businesses setting up shop in the capital is always a good sign, but industry analysts are suggesting that this may cause occupancy levels to soar, and therefore rents and competition will undoubtedly reach tipping points; so much so that there may not be enough stock in the city to meet demands. This is already reflected in the fact that the average property in London is 6.5 times higher than the national average, at just below £1.5 million.

Furthermore, the CBRE reports that average yields have slightly fallen over the first half of 2013, especially in the industrial and office sub-sectors, while the retail market continues to be polarised, with growth and falls recorded in the south-east and the rest of the UK respectively. These figures suggest that investor returns will continue to fluctuate until the economy stabilises.

So, to invest or not to invest? For buyers, this is the perfect climate, and they should take advantage of the positive conditions, but ensure that you do enough research so as not to end up in a sticky situation. When in doubt, seek professional advice.

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