In today’s discussion, a pressing question looms large: Will commercial property recover? As someone with an innate optimism, my answer is a resounding “yes.” The property market is known for its cyclical nature, and while challenges abound, there are promising developments worth exploring.
Will commercial property recover?
A significant indicator I’ve encouraged everyone to watch is the Knight Frank Prime Yield Guide. The September edition paints a picture of a market generally characterised by weakness or stability. However, there are notable exceptions, such as data centres with 15-year leases and annual indexation, which have seen a positive trend, witnessing a 0.25% decrease in prime yields.
Yield Trends Across Sectors
Conversely, most other sectors have either maintained stability or experienced a 0.5% increase in prime yields. Notably, good secondary southeast business parks have seen a 1% increase in yields, with some changing hands at 12% or more.
Regional Opportunities
For those seeking yields above 10%, the focus should shift to offices in good secondary or regional cities like Leeds, Canterbury, Exeter, and other locations. Additionally, good secondary offices in the southeast regions, excluding London, are projected at around 11%, while good secondary southeast business parks are expected to reach 12%.
Market Sentiment and Future Possibilities
While market sentiment may appear weaker, negative, or stable at present, it’s a reflection of the times. The future, however, may hold more positive market sentiment, especially with the base interest rate holding steady. Some areas in the UK, such as the southwest and the northeast, are witnessing fewer property transactions, but properties are still transacting at decent yields.
Retail Transformations and Opportunities
Amid these dynamics, traditional retail is facing upheaval, exemplified by Wilko’s recent challenges. The closure of such stores creates opportunities for other retailers like Poundland and Poundstretcher to fill the void. Retail spaces in town centres may undergo transformations to accommodate evolving consumer preferences.
Wetherspoons’ Strategic Property Moves
Another noteworthy development is the decision by Wetherspoons to sell or lease some of its public houses. This strategic move aims to rationalise their property portfolio and exit locations that may become more costly to maintain. These properties are available for sale or lease and can be explored here.
Diverse Investment Landscape
Despite the evolving high street landscape, investors are actively participating in the market, albeit with a 40% reduction in investment by major property companies compared to the previous year. However, these investors are diversifying their focus, looking beyond London and Cambridge to places like Grimsby, Surrey, Bristol, Glasgow, and others, where they can acquire properties at attractive yields and revamp them.
Market Share Distribution
The market share distribution reveals 31% in retail, 28% in office spaces, 27% in industrial properties, and 14% in leisure and hospitality sectors.
New Players in Lending
Furthermore, unconventional investors are entering the lending space, with traditional high street banks accounting for only 41% of commercial property funding. International banks contribute 28%, while the remaining 31% comes from other lenders and private investors. This influx of new players, such as property companies and smaller estate investors, is an exciting development.
Local Initiatives and Community Building
Additionally, local councils are getting involved by leasing buildings and subleasing them to local startups and businesses. This initiative bolsters local economies and creates tailored spaces that cater to the specific needs of the community.
Conclusion: A Resilient and Transformative Future
The future of commercial property is one of transformation. While recovery may not happen overnight, the industry is evolving to better serve local residents and businesses. Investors have the opportunity to shape the future of commercial property by capitalizing on the changing landscape and identifying promising opportunities. Ultimately, the commercial property sector is poised for a brighter future, with resilience and adaptability at its core.
PS If you didn’t catch our podcast last week you can listen here.
