Traditionally the reserve of pension funds, commercial property might soon become the next trend in investment
Commercial property only means one thing where I’m sitting right now (on a beach in the Maldives surrounded by holiday lets). Commercial property is idyllic here and worth $1bn a year to the country via tourists and accounts for 90 per cent of its income.
Tourists are not irrelevant to London but when it comes to investing in them, it’s not most investors’ number one choice.
Those seeking to invest in commercial property look to adopt a fire and forget policy. Buy and develop a building, rent it (preferably) to a single tenant with a good covenant for as long as possible, often 10 – 15 years, and then get the building back in the same condition it was when first let.
The bonus being that the tenant pays for insuring and maintaining it in the meantime. Unlike residential lets, the tenant can stay as long as they want so long as rent rises are agreed and paid.
Such investments tend to revolve around yields, and if you’re a landlord lucky enough to be in business when usual investment returns crash, you might get some capital growth.
Residential investing is almost the complete opposite, in that tenants need to be managed intensively and sensible landlords look for long term capital growth over yields.
The long term nature and relative stability of commercial lets mean they’ve been a target for pension funds for years. Indeed, they own a majority stake in our property on the basis that yields are safe and will iron out macro economic ups and downs.
The same cannot be said for residential property which has always been considered too labour intensive for the tsunami of pension fund money out there.
This voracious, regulated and increasingly nervous body of cash can create problems of its own. Despite the relative stability of the base investment, something of a lemming mentality exists amongst those who seek to invest your pension money, meaning everyone is either heading for the exit or busting to get in. This in turn means that, paradoxically, the value of such investments can be very volatile.
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You’ve only got to look at the value of commercial property over the last few years to see that.
How a new property bill could change it all
But for the average man in the street commercial property may be about to enter a whole new era. Just as residential buy-to-let satisfies many small investors’ desire to be in control of their pension destinies, many have looked at investing in a simple office buildings or parades of shops for the same reason.
Dwellings is the buzz word though now – on the Government’s, and many local Boroughs, lips. A white paper soon to start it’s path through Westminster, might just change the way some investors look at commercial property.
For the first time in years it appears a concerted effort is being made to open up office and commercial space to traditionally more remunerative residential investment by making conversion of such property to residential use easier.
The current economic climate has meant that one in ten shops in the UK sits empty and you can see that walking down most streets. Office blocks are similarly blighted by many a ‘To Let’ sign.
Indeed when I wander down some of the smartest streets in central London, and despite an obvious demand, many prime commercial spaces seem to be left empty. I use the word left advisedly here, as despite offers from end users to rent from substantial and rich landlords, these offers are very often turned down. So it seems many of these wealthy landlords would rather have their spaces empty.
Why is difficult to determine? Perhaps they are either waiting for a big name tenant as a draw, or they’d rather have other tenants in a parade believe that if they want to stay their next review will be similarly hiked.
Perhaps seeing all these shops empty for long periods has given those in power, who drive around and live in such areas, the impression that something needs to be done.
Whatever is done the possible changes to the Town and Country Panning (General Permitted Development) Order 1995 (as amended) could be the thin end of the wedge when it comes to increasing the number of homes available for sale, and for many it may well alter the way some commercial property is valued.
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