Is Now The Right Time To Invest In Commercial Property?

by eddisons on August 28, 2012

  • Sumo

With commercial property taking somewhat of a dive during the economic downturn, many investors have been wary of the sector.  However, the last two years have, on the whole, seen the performance of commercial property steadily improve; prompting investors to again consider it as a viable option.  So, are the returns currently offered attractive enough to tempt you?  And is the sector likely to retain its strength for the foreseeable future?

Impact of the economic downturn

On August 9 2007, French bank BNP Paribas announced that investors could not withdraw money from three of its funds due to their inability to value assets held within them, citing the markets “complete evaporation of liquidity”.  The announcement, and date of it, is now widely accepted as the start of the credit crunch, which had a negative impact on both commercial and residential property values.  Over the next year and a half prices dropped steeply, causing some property funds to lose value to the tune of almost 45%.  Investors were hit doubly due to the fact that an increase in the number of failing businesses saw a decrease in the demand for commercial property; forcing rental prices ever lower.

Rise and fall

Quarter 2 of 2009 saw the first signs that the UK economy was recovering from the economic downturn and beginning to grow.  Property values began to steadily rise again, as did rental prices, culminating in an annual return of around 5% in 2009 for those with commercial property investments – significantly more attractive the average stockmarket yields of around 3%.

Commercial property uk 2012 statistics


However, the impact of much publicised ‘double dip’, which saw growth in the UK economy slow during 2010 and then shrink in much of 2011, has brought total returns down to just 0.4% in Quarter 2 of 2012.  A fact that is understandably worrying to investors, who may be considering adding commercial property to their portfolio.  Yet, there are signs that indicate now could be exactly the right time to do so.

Looking ahead

As you would expect, the shrinking of the economy and fall in commercial property yield correlates with a fall in property value.  However, as Investment Property Databank’s UK Property Index Graph above illustrates, figures show that the falling yield is now beginning to plateau.  This, combined with a positive 4 year forecast for the UK economy from Chancellor George Osborne, suggests commercial property could well represent a sound investment.  The latest figures from the independent Office for Budget Responsibility (OBR) expect the economy to grow significantly between now and 2016:

  • Estimated growth in 2013 – 2.0%
  • Estimated growth in 2014 – 2.7%
  • Estimated growth in 2015 – 3.0%
  • Estimated growth in 2016 – 3.0%

When you consider the continuing positive impact that the London 2012 Olympics Games are expected to have on the UK economy, it is understandable that the OBR and Chancellor are positive about the economy moving forwards.  So, with commercial property prices still around 35% lower than 2007 and which are likely to increase as the economy grows, investment now could be the perfect time.  However, it could be a few years before such an investment begins to deliver significant returns and anyone interested in commercial property should be prepared to stick with it for the medium to long term.

Image provided by IPD

A guest post by Eddisons – experts in commercial property management.

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