Karen Bennett, managing director of commercial mortgages, Shawbrook Bank, examines the commercial property investment market
Given the array of changes affecting the residential investment market, it was perhaps somewhat predictable to see a resulting uptick in commercial investment enquiries. The prospect of the 3% surcharge on SDLT for residential and the impact of section 24 makes commercial investments seem more appealing, with good yields and FRI leases that may well suit both the hands on and passive investor alike.
However, commercial investment is a different animal to the residential space, and one that needs to be researched and considered in far greater detail. Not a week goes by without a news report regarding a turbulent time in the world of business.
Many well-known high street chains, such as Maplin, Carpetright, etc continue to suffer despite a relatively stable economy. The leisure sector, specifically pubs and some restaurant chains, are struggling and manufacturing/engineering also seems to be taking up significant column inches with brands such as Jaguar Land Rover looking closely at jobs. So investors considering commercial property must be very aware of exactly what they are looking to buy and who the likely tenant will be. Compared to the same point last year, we have seen an significant increase in commercial purchase enquiries with the majority of these being for wholly commercial properties as opposed to mixed use, so the predicted shift is starting to play out.
As previously mentioned, SDLT on residential purchases causes a bigger problem on higher value assets, so areas such as London are seeing these investments decline whilst commercial holds steady. Looking at the capital, we can say that it has its own dynamic as far as commercial property is concerned. Firstly this sector holds a significant value meaning many properties are owned by large institutions or foreign investors and do not come up for sale as frequently as in other areas. London is also a key centre on the global map as a hub for business, so no matter what the future holds it will always be an attractive city from which to operate and hold investment property.
With the vast swathes of commuters that travel into London, we see additional pressures on infrastructure such as the rail network which has resulted in many organisations and smaller operators looking for flexible work patterns. This has promoted a rise in those working from home or opting for use of such premises as “We Work” who offer flexible working spaces. This demonstrates the need for more properties that offer alternative use in order to accommodate these changing trends, both in work patterns and how companies chose to distribute their products (i.e. moving away from high street presence to online, leading to a rise in warehouses over retail).
The reality with commercial property not owned by the corporate world is that these types of security have traditionally been longer term investments that are retained and passed down to family members. This creates a good re-finance market and we have seen a number of commercial portfolios look to specialist lenders such as Shawbrook for financing due to the way they stress income, and the flexibility of the products they offer such as interest only, higher LTVs and less restrictive covenants.
The future of the commercial market, specifically in London, is likely to remain a steady one with investors who are able to adapt to a changing landscape likely to prosper. The result of significant change such as Brexit may well dictate where some companies chose to operate, but global companies rather than domestic ones are likely to feel this more acutely which will have less of an impact on the general commercial property market. Having stressed the impact of the residential changes, (providing the government don’t turn their attention to commercial investment), this security type is likely to continue to grow in popularity. Areas such as London, which traditionally offer investors capital growth as well as income, will continue to attract investors for the foreseeable future.
Perhaps a word of caution to finish in that in times of slowdown or recession, commercial property can often be hit the hardest putting pressure on investors who opt to be highly geared, or who have a lack of surplus income to cover voids. Seeking specialist advice with a view to careful consideration of key factors such as LTVs and solid lease agreements are always advisable, and surely the most effective way to build sustainably for the future.