What is Commercial Property?
UK Commercial Property is an established asset class with the market valued at £900b and £500b of the total stock held by investors. Investors own premises which are let to occupying businesses, with offices being the largest sector, followed by retail, then industrial. Alternative sectors such as car parks, healthcare and hotels are growing in popularity among investors as technology drives change in the way we live, work and shop and the demographic balance of the population evolves.
While smaller than the £1.3 trillion private rented residential sector, commercial property is a professionalised asset class, with the majority owned by institutional investors and property companies, as opposed to the private landlords who own more than 90% of residential investment property through Buy-To-Let. The pie chart shows the UK commercial property investment market broken into the main categories of owner type. Institutionally managed funds are the largest owner with a 32% share of the market.
Property Partner will offer our investors direct access to a selection of hand-picked commercial properties, and with it the opportunity to build a diversified portfolio. Read more about investing in commercial property with Property Partner here.
What makes Commercial Property an attractive investment?
We believe Commercial Property offers a complimentary return profile to Residential and Purpose-Built Student Accommodation (PBSA), with total return driven by a secure, long-term income and the strength of the lease in place with a tenant. As an asset class, Commercial Property offers a number of benefits, including;
A strong and secure rental yield
Commercial Property is a high yielding investment, which is particularly attractive in the current environment of ultra-low interest rates, despite the minor increase last month as the Bank of England attempts to steady inflation. Rental income is secure when a building is let to a high-quality tenant, often upwards of 10 years, with the most robust leases frequently compared to fixed income investments such as bonds. Rent is usually paid monthly or quarterly in advance.
Commercial Property rental growth is closely linked to the value of businesses in the economy, providing a growing income stream for investors over time. Furthermore, future rental growth on a property investment is often contracted within the terms of the lease on an upward only basis, and even linked to inflation, providing growth throughout the economic cycle.
Long term capital value growth
The value of Commercial Property is based primarily on the income it can generate for an investor, with the strength of the lease and covenant of the tenant being key determinants of that value. As the rental income earned by a property grows over time so does the value of the building, with the potential for prices to change by more or less, depending on market conditions.
Limited management responsibility
Commercial Property is less management intensive than Residential and PBSA, with the tenant typically taking responsibility for the upkeep of the building and refurbishment. This agreement is usually formalised with a full repairing and insuring lease (FRI). Asset management is required to ensure tenants are keeping up their terms of the lease and at key stages during the investment cycle such as when a lease needs to be re-negotiated.
How has Commercial Property performed as an investment?
The chart below shows that UK commercial property achieved an average annual total return of 8.9% over the past 20 years, made up of an income return of 6.1% and capital growth of 2.8%, with income return exceeding 4.5% every year during this period.
UK commercial property values, as with much of the global economy, were impacted during the global financial crisis of 2008, but the asset class has responded with 8 consecutive years of positive performance since then. Investors can mitigate risk by investing in sectors which are less susceptible to reduced occupier demand and business insolvency in the event of an economic shock. Read more about the risks of investing in commercial property and why we’re comfortable with them here.
Rents grow as the economy expands, providing investors with a growing income stream and protection against inflation. The chart below shows that commercial property rental values grew by 2.1% per year between 1996 and 2016, compared to 1.9% for inflation.
The chart below displays that, historically, on a risk-adjusted basis, all property sectors have outperformed other major asset classes such as the stock market and gold, with higher average annual total return (vertical axis) and noticeably less volatility (right to left on the horizontal axis).
Industrial properties were the strongest performing sector within commercial property, with an annualised total return of 9.8% over the last 20 years. Each commercial property sector has different characteristics which can suit different investors, with a wide variety of investment types providing the opportunity to diversify within a commercial property portfolio.
Read our blog about the risks associated with Commercial Property and why we’re comfortable here.
Important notice: Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Forecasts are not a reliable indicator of future performance. Gross rent, dividends and capital growth may be lower than estimated. 5 yearly exit protection or exit on platform subject to price & demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary.
Financial promotion by London House Exchange Limited (8820870); authorised and regulated by the Financial Conduct Authority (No. 613499).