The last time there was a run on commercial property with IFA’s recommending ISA investments in the sector, this led, in our view, to excessive demand with the sheer “weight” of money driving down yields and forcing up capital values. The inevitable “correction” in values couple with the financial crisis, saw losses exceed 30-40% (which reflects the fall in values which is, as it happens, a good marker for the area we operate in).
The market in central London for absolute prime property seems to be possibly overheating? We say this with caution but our comments are based on many discussions we are having with fund investors and high net worth individuals who state that they are constantly out bid on stock and that it is very hard to secure. The number of bidders on prime stock has increased, particularly overseas investors seeking a safe haven for their money. So what is the answer in this situation?
Well believe it or not life does not stop outside the M25. There are countless UK businesses which do not need or have the desire to be based in the capital and as such we believe there are fantastic opportunities out in “the sticks” for commercial property investment. In some cases yields can be close to double digit, so if its income that you want then these locations may be the answer.
Yes, investments should not just take account of yield but consideration needs to be given to tenant covenant, lease length, age of building, prospects of re-letting etc. but with yields so low on certain investments in ultra-prime locations you have to question where capital growth will come in the short to medium term, if rents are considered at market level. If you can acquire UK wide high yielding investments where demand starts to exceed supply, forcing yields down then at least there is the prospect of capital growth through yield shift !
The likely winners in all this are those who will identify sound investment opportunities perhaps away from the institutional markets (in other words retail funds) and who are direct investors in bricks and mortar….. well that’s one view anyway !