According to the latest figures from the IPD UK quarterly property index, total returns on direct UK commercial property rose by 3.5% in Q2 2015: but is it all good news for investors and landlords?
There are certainly plenty of signs that commercial property is likely to deliver reliable returns for at least the next 12 months.
Research from CBRE shows that prime rental values in UK commercial property rose by 5.4% in Q2 and, perhaps even more significantly, The Royal Institute of Chartered Surveyors (RICS) reported that demand for UK commercial property rose for the eleventh consecutive quarter, while available space fell for the ninth time in a row. This bodes well for both capital values and rental yields.
Consistent improvement has increased competition for prime investments, and not just from UK based investors. Lambert Smith Hampton’s UK Investment Transactions Report(UKIT) shows that just over 50% of Q2 purchases were made by overseas investors, and 36% of RICS members reported an increase in enquiries from those looking to buy from abroad.
Given the extent to which overseas investment in the London property market has forced many commercial landlords to consider moving their money to the regions, it may be wise to keep track of areas where an influx of funds could push prices above fair market value.
Another major trend cemented in Q2 2015 was the growth of commercial property yields across the country. UKIT figures were driven largely by strong investment in the regions, and RICS members are widely agreed (95%) that commercial market valuations are still at or below fair values – leaving headroom for more capital growth, perhaps as much as 10% according to RICS chief economist Simon Rubinsohn. The exception, however, being the former economic powerhouse of London, where 50% of RICS members say valuations are now ‘expensive’.
There’s also a divide between commercial property types. IPD figures for Q2 showed that office space delivered returns of 4.9%, industrial property 4.3% and retail just 2.2%.
Nonetheless, with rising demand and an improving economic landscape, there are still plenty of opportunities to be seized by savvy commercial landlords and property investors, as long as they're willing to look outside the capital.
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