Commercial property can be much broader in scope than residential assets. Residential purchases can typically be segmented into a few key areas. This includes houses, flats and maybe mansions. Each of these will have several sub-categories but are still likely to be straightforward in comparison to commercial property.
Some initial images may come to mind when thinking of commercial property. Obvious examples include offices, leisure centres and shopping centres. But, commercial property stretches across a huge range of options which may not be front and centre. Logistic hubs, factories and even universities can all fall into the commercial category.
Larger loans, typically stretching into the millions, can be utilised for both residential and commercial investments. They’re much more likely to be needed for commercial purchases however, given these tend to be much more costly.
It can be tricky to accurately compare prices across the two, given the variation at play. However, average house prices in London are sitting at £524,000 according to the Government’s latest figures. Whereas Realla, the commercial property search engine, currently has the average price of commercial property for sale in the capital at just over £3.6m.
As such, larger loans for commercial investments may be needed out of sheer necessity. But on top of this, intensity in the market may mean investors will need to have access to large funds just to keep up.
Demand shows no signs of slowing down
Commercial property as an investment was one of the success stories of 2021. Throughout last year, industrial and logistics property demand rose, taking total returns to 36%, according to abrdn. Retail warehousing also performed well, as did other assets liked to discount retailers and supermarkets. Investment volumes into the commercial sector rose to £57bn in 2021, up by 21% compared to 2020.
Landlords are also benefiting from rising demand in the commercial sector. Following the pandemic years, commercial rental properties are becoming highly sought after. Some 26% of all commercial retail units currently listed on the market are already let or had a let agreed on them. This demand is highest in London, but the East of England and Southeast are also emerging as commercial rental hotspots.
Rising demand for commercial space is likely being driven by a reversal of lockdown rules. As the world began to open, businesses and consumers alike were desperate to utilise the freedoms they once took for granted. Additionally, workers across the UK started flocking back to their offices en masse. The notion of flexible working becoming the norm ended up overblown in many industries. Many workers are desperate to get back to their offices, potentially creating even more demand.
Commercial property also emerged as a potential solution for the mismatch between residential supply and demand. As supply of residential homes struggled to keep up with demand, investors turned to converting old office buildings into flats. Given that plenty of commercial space still lies dormant in the UK, we could see more conversions on the horizon.
With all this demand, those with access to larger sources of funding are likely to fare better. Given how intense the market can get, sellers can have the upper hand. Buyers who attempt to outbid each other with small incremental increases may be overshadowed by those who can offer substantial amounts without delay.
Commercial investors need to act fast
While demand for commercial space may be on the rise, buyers are still competing over relatively few options. A “lack of stock” in prime commercial properties has created pressure in the market according to Savills, while limited office space came to the forefront in the 1st quarter of 2022. Where these limited options are found, those who can jump on the opportunity quickly will have the edge.
There is evidence that speed in the commercial world is proving increasingly important. The amount of money being spent in auction houses is on the rise. Auctions are often utilised by investors wanting to snap up an opportunity quickly, with completions often taking mere days.
Allsop, the leading property auction house, raised more than £96m in its May commercial auction. Reportedly, this was the highest total achieved in an auction in the UK since the start of the year. Additionally, of the 123 lots it had on offer, 106 were sold to private investors, meaning individuals may be wising up to the fact they’ll need to move quickly to get ahead in the commercial world.
New legislation could make things complicated
Large loans are often issued to buyers facing complex circumstances and for those in the commercial space, things are set to get particularly complicated. A range of legislative changes are in the pipeline which will need to be factored in for both purchases – and what comes after.
The Levelling Up and Regeneration Bill, currently making its way through parliament, could have dramatic repercussions for commercial landlords. Under the Bill’s proposals, where commercial properties in town centres and on high streets have been vacant for over a year, councils may step in and get them auctioned off.
A unified Employment Bill has also been looming over the UK since around 2019. This Bill is set to bring in a range of changes for workers and their employers, including making provisions for flexible working. Energy efficiency rules will also be introduced from as early as next year. Commercial properties must soon have an Energy Performance Certificate (EPC) rating of E or above.
Of course, these are just the legislative changes we’re aware of. The Government may plan to target commercial landlords and investors more over the coming years in a bid to balance the books. Michael Gove, the Housing Secretary, recently made his views clear he’ll be bringing the fight to unscrupulous landlords, while also branding some house builders as a cartel.
As commercial property faces changing legislation, investors will likely want to have access to larger loans to keep up with the higher costs often associated with new laws.
MFS are a bridging loans provider, not financial advisors. Therefore, Investors are encouraged to always seek professional investment advice.