Brexit uncertainty could see commercial property returns halve this year

Returns on commercial property could decline by as much as half during 2016, a new industry report has warned. So should landlords be bracing themselves for a tougher-than-anticipated year? 
 

The impact of Brexit

In its most recent commercial property report, property consultancy firm Cluttons has predicted just 6.5% returns for the commercial property sector as a whole this year, a considerable decrease from 2014’s returns of 19.3% and 2015’s 13.8%.

Faisal Durrani, Cluttons’ Head of Research said that diminished returns can be attributed to the “challenging headwinds” of Brexit uncertainty and the slowing down of economic growth.

“The uncertainty and nervousness being fuelled by the in-out EU referendum is impacting the value of sterling and the volume of property transactions,” said Mr Durrani. He added that commercial property prices “are likely to fall” if Britain decides to give up its EU membership.
 

Is the bigger picture rosier?

John Barrett, Cluttons’ Head of UK Valuations, said that while commercial property returns may be diminished, they actually compare favourably to markets like decade-long gilts, whose yields are currently worth just 1.5%. In May 2007, when the ten-year gilt market previously peaked, returns were 5.8%.

Mr Barrett explained that commercial property “is in a much more robust shape to cope with any economic downturn” compared to other investments, and that it’s unlikely to crash even if the economy as a whole takes a sharp turn downwards.

He added that landlords should consider boosting their incomes through “asset management initiatives” – such as restructuring leases, initiating refurbishments and changes of use – or via “rental income growth”.

The property consultancy company believes that landlords in the industrial and office sectors are particularly well placed owing to strong tenant demand and the reduced speculative development of the last few years.

Landlords who are struggling, however – perhaps because they’re considering removing a tenant – shouldn’t suffer in silence, particularly if they expect their returns to shrink over the course of 2016. Using Dukes' ethical Enforcement Agents to recover unpaid rent arrears or evict a 'problem' tenant would have the desired positive impact on their finances.