Investing In Commercial Property
AN ORIGINAL ARTICLE FROM SQUARE MILE INVESTMENT SERVICES
One way investors can access this asset class is through buying open-ended property funds,which look to pool the money of investors together in order to invest directly in these kindsof properties. These funds seek to benefit from both the growth in capital values of thesebuildings and the income generated by the rents paid by the respective tenants
The performance of the property market, however, is closely linked to the economy,therefore gaining Commercial properties include such spaces as offices, industrial buildings, shopping malls,warehouses, retail parks, hotels, cinemas, and logistics buildings.
Investing in commercialproperty can usually be considered as being a good diversifier in client portfolios.more immediate access to your investment can be more difficult. It is for this reason, investing in commercial property via these funds has come under greater observation, being the focus of a long running review by the FCA.
We have observed the following trends in commercial property in recent years:
- Given the relationship between the asset class and the broader economy, commercial property is often impacted during recessions or periods of significant downturn. As these more difficult times tend to be accompanied by a loss of general confidence,rising levels of unemployment, and greater difficulty in accessing financing, it can result in a decline in property values and a slowdown in sales
- In the US, rising interests have been negatively impacting the commercial property
market with falling transactions, softer pricing, and lower demand for offices, following
the increased adoption of flexible working post Covid.
- Investors have become more cautious, and as the cost of borrowing has risen, so has
the cost of mortgages and loans, which has made life more difficult for both owners
and potential buyers.
- In the UK, demand for commercial property has also decreased alongside the
economic slowdown. Office space is causing the greatest concern, given the rise of
the hybrid working model. Challenges are also being felt in older offices in peripheral
locations, whereby the amount of empty space has climbed steadily since Covid.
- New buildings, top-end space, and those buildings in prime areas such as London’s
West End, however, are still seeing demand, especially those which have
- While city centres remain relatively popular, locations further out are struggling and
there are big variations even in desirable areas, though this is very dependent on the
age, quality, and location of the building.
- Many of the property funds have been in net outflows, and have been selling assets
to meet these redemption requests. Though these outflows are slowing in some
circumstances, given the FCA is likely to make daily pricing for these vehicles
untenable, it is difficult to see how these funds have a long-term future in their current
form. Sales are, however, taking place at market value and there is no evidence to
suggest that “fire sales” are likely.
- The outlook within the sector is mixed. Industrial occupational properties are being
favoured and there is the potential for a recovery to continue in leisure and buy-torent
assets, such as student accommodation,supermarkets and leisure facilities alongside ongoing weakness
in shopping centres and high street shops.
The market for UK commercial property remains challenging as the higher interest rate environment provides a major headwind. We do not currently own physical commercial property funds in our portfolios because of both the rising cost of finance, which is historically accompanied by weakening prices, and the poor liquidity which could become problematic if the outlook for UK property gets even worse.
- The Investment Management Team, Square Mile Investment Services July 2023
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