Market Insight

Commercial property investment – making sense of current market conditions

July 8, 2019

If the headline property investment figures from Property Data comparing H1 figures from 2018 with H1 2019 are anything to go by, you might be forgiven for thinking that things look a bit bleak. 

But for the educated investor there remain several interesting investment opportunities to consider, as Richard Goodall, commercial property investment partner in our Birmingham office discusses: 

Private investors together with an increasing number of local authorities continue to remain active buyers in the market, whereas the main institutional purchasers remain on the side lines awaiting the resolution of, what seems to be, the never-ending Brexit story. 

When we look at investment volume there was over a 40% drop in the number of transactions by value in H1 2018 when compared with H1 2019, from £28bn to £16bn. 

This is a good indicator of how the market is responding to the wider economic and political uncertainty. 

Of those acquisitions, approximately 22% of net investment was made by overseas investors (£3.6bn), whilst institutional investors about accounted for just £787m.

Surprisingly, private and listed property companies disinvested circa £1.6bn – about 10%. 

When we look at the figures comparing the sale of property assets across all sectors in 2018 and 2019, we’re seeing a disinvestment of just over £5.7bn in offices and, not surprisingly, in retail a disinvestment of £1.35bn. 

Interestingly, despite the perception that industrial is the sector in which to invest, volumes were actually down £1.6bn year on year. In fact, activity across all the main sectors has been reduced when compared to last year. 

And whilst overseas investors place a net £3.6bn into the property market in H1 2019, this figure probably accounts for only a handful of buildings in central London and Canary Wharf. 

So, what does all of this mean for the property investor?

The market is clearly incredibly uncertain. 

Most investors are very cautious about selling and buying and have been since December – no one wants to be seen buying in a falling market for obvious reasons.

From the seller’s point of view several institutions have been constrained by historic 2018 valuations which, perhaps, do not fully represent where market pricing is today.

And in the retail sector in particular no one wants to ‘catch a falling knife’. 

On the other hand, the majority of buyers are seeking a discount to reflect the current market. 

For most private investors, leaving their cash sitting in the bank simply is not an option. They would far rather look to acquire an investment and receive a positive return on their cash. 

In addition to the private investors that are active in the market, several local authorities remain focussed on expanding their commercial property investment programmes as they continue to seek alternative income sources to fund and maintain the provision of our public services. 

Indeed we’ve acted for many local authorities across the UK who have been, and remain, active property investors – particularly within (but not confined to) their local authority boundaries. 

So yes, the market is changing but the local authorities are still looking for commercial investment. 

And despite current market uncertainty that is not to say that it’s a buyer’s market. 

There remains very strong competition for those assets that provide long term secure income streams across all the main sectors. With the current market in mind, why should vendors of property consider selling if they don’t have to? 

Notwithstanding the reduction in transactional volumes there is still enough evidence at the prime end of the market to maintain property valuation levels. 

It is, however, the secondary and more peripheral locations where we are seeing more significant value reductions and limited, if any, rental growth. 

In the post-Brexit world (if of course there is one) we anticipate a small positive bounce in investor confidence which could lead to increased transactional volumes and more normalised market conditions as we enter 2020.

For more information about current property trends or to discuss your commercial property investment aims, please get in touch.