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The strengths of commercial property

By Nicholas Watts

In common with every other sector, commercial property has taken a severe beating regarding values. But, with markets on the floor, perhaps now is the right time to take a closer look at this asset class to see what opportunities, if any, are out there.

The problem with the word ‘property’ is that it covers a huge market and there can be big disparities depending on the sector and location you are looking at.

However, before we get carried away, let me remind you about why commercial property can be a useful investment.

Traditionally, the main strengths of commercial properties were their tangibility as an asset, coupled with a rental income stream that was predictable. This has not changed simply because there has been a global economic crash.

Property, like all markets, is about supply and demand and goes in cycles. It had done very well and, irrespective of the current crash, was merely due for a downturn.

You might suppose that this is mere idle speculation or even wishful thinking on my part. So, what are the professionals saying? The official monitor of this market’s trends is the IPD Index, which checks all the different commercial property sectors.

One of the founders of the Index has said that office rentals are falling and that this has had the effect of reducing values still more.

The statistics confirm that in March 2009 office rentals as a whole fell by 2.6%, with a 0.86% fall for retail and a 0.56% drop for industrial.

Clearly, as businesses fail, office property is also vulnerable to sudden voids. The obvious example is London where the latest issue of Commercial Property Analyst, commenting on rents, predicts a 25% fall over the next two years.

But that is only one sector and other sectors may be better defended in terms of rents and values. The consensus view that is emerging is that by 2011 the market will have improved.

Yields are looking quite high in some areas and, remembering the importance of the income stream, should investors be encouraged to have a serious look at what is available now? What is on offer? And is anyone else buying into the market?

It is clear from inquires that some overseas pension funds and sovereign wealth funds are seriously interested, as they are unable to obtain elsewhere the level of income which some UK properties are offering — and that includes equities, bonds or cash. The problem for most investors has always been how to buy into good quality commercial property, at sufficient size of deal, to get the high quality tenant that will ensure the rent.

Unless you have a very deep pocket — to the tune of some £3m — you will be limited to a very high-risk market as far as tenant security is concerned.

There are ways round this. One of them is to join a Property Limited Partnership, where you can put in a nominal investment of around £25,000 and become part of a £10m-£15m project.

These are professionally managed and have the added advantage of doing a lot of the market selection and due diligence for you. The interesting point to note is that some of the income streams here are at 7.5% p.a. on top of any capital growth.

You will, of course, need to check out any previous projects that the promoters have done, but the main advantage of joining such projects is that you can get talking to the people running the project to find out all you need to know before you invest.

In conclusion, there is good value out there. But do your homework and be aware that some of the best deals may not be widely advertised.

Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website

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