Economic pressures expected to impact commercial property returns, expert warns

The commercial property sector is bracing itself for June’s EU referendum and the possibility of rising interest rates, both of which could affect investors’ returns. What impact could these politico-economic developments have?

Economic pressures

Marcus Langlands Pearse, who co-manages the Henderson UK Property fund, has predicted that potential rising interest rates and the uncertainty surrounding the UK’s EU membership could hamper commercial property returns.

In an interview with financial information provider Citywire, Mr Langlands Pearse said that diminished returns will be particularly felt in London, where investments largely come from abroad. “Many overseas buyers have suspended further investment [until the referendum result],” he explained, “particularly in the larger lot sizes.”

However, some sectors appear to be faring better than others. While retail is facing up to the challenges posed by online shopping, the so-called alternatives sector – including data centres, hotels and student housing – is coping much better. According to Mr Langlands Pearse, this is down to “long leases, strengthening covenants and good relative pricing”.

Short and long-term outlooks

Mr Langlands Pearse’s interview with Citywire suggests that returns “are likely to be more muted in the coming months”, but the long-term outlook may be more positive. The commercial property market is more apprehensive than it once was, but fund managers and finance experts are generally remaining upbeat. This is because commercial property has a habit of recovering. While returns were -22.1% after the financial crash in 2008 – according to the IPD UK Annual Property Index – they grew to 17.8% in 2014 before falling to 13.1% in 2015.

Nevertheless, in the coming months diminished returns may be an unfortunate, albeit short-term, reality for the UK’s commercial property market. With investors putting their plans on hold, and less capital flowing in and out of the sector, it’s possible that landlords may feel the effect. However, with financial planning that aims to eliminate commercial rent arrears, property owners can safeguard their cash flows during these uncertain times.