The Inside Edge
A guest post by commercial property management specialists Eddisons.
The credit crunch impacted on many investment areas and commercial property was no different. However, the sector is now becoming a viable option again, as investors look for more stable options, with cash and bonds returns continuing to fall. But where it was once the opportunity of capital growth that drew investors to commercial property, it is now rental income that pulls them in. So, what is it about commercial property rental income that makes it such an attractive proposal?
Whilst figures vary slightly throughout the UK, commercial property can yield in the region of 6% per year. What is more appealing is the length of the contracts that commercial property can command. Whilst residential property tends to be rented on a 6 or 12 monthly basis, landlords of commercial property can expect contracts of 10 or even 20 years. This obviously offers great stability to the landlord and plenty of time to negotiate a new contract or find a new tenant should the current one signal their intention to leave.
The value of UK commercial property decreased a national average of 2.3% during 2012. Although property prices in London fared much better, they still remain 21% below their peak price of 2007. This of course mans that there are some good deals to be had by investors. With the construction industry still struggling to recover and few new buildings planned, the demand for commercial property is increasing and will continue to do so in the coming years. Even once construction levels do increase; it will be some years before the properties are ready to welcome tenants. The situation will only help to strengthen the hand of commercial landlords and the rental figures they can command.
All UK commercial property has index-linked rent reviews that are carried out on a regular basis. This allows rental figures to stay in line with increasing prices; thus protecting against inflation. This low risk investment is further sweetened by the fact that tenants are responsible for the upkeep of commercial property, which is not the case with residential property. This hands off landlord approach is desirable to investors with other business interests to juggle.
Easy Entry and Exit
Commercial property does of course tend to be more expensive than residential property, but the prices are not a barrier to anyone looking to invest. Property funds and Real Estate Investment Funds (REIFs) offer a route into the sector; allowing investors to buy shares to the value that suits them. Should the investor wish to liquidate their assets, this arrangement also allows for a quicker and simpler exit; with shares being much easier to sell than a whole property.
The UK commercial property sector is currently in a strong position; with increasing rents and low capital prices providing investors with solid yields. There is no indication that this will change in the longer term, making commercial property a viable addition to your portfolio.