Commercial property enjoyed a bumper year in 2017, with investors not put off by Brexit or political uncertainty and encouraged, rather than deterred, by the drop in sterling.

London’s safe haven status helped to keep transactions volumes high, with overseas investors continuing to plough plenty of money into offices, warehouses and retail space.

As we analysed in a previous blog, low stamp duty, long leases, strong yields and (for overseas investors) the weakness of the pound makes commercial property highly attractive, often more so than residential property.

Huge sums witnessed in 2017

In the first half of 2017 some £14 billion was invested in commercial property in London on its own. The West End, in particular, drew a huge amount of investment in commercial property last year – helped by being a prime spot for entertainment, retail, office and start-up space. Some £2.1 billion was invested in just eight £100 million-plus deals alone, the highest volume the capital has ever seen.

Investment has been unaffected by Brexit, with Savills reporting that Asian investors spent more than £5.4 billion on commercial property in London between the end of June 2016 and the start of 2018. In the same time period European investors spent more than £3 billion on London commercial real estate, Middle Eastern investors pumped in more than £1.9 billion and US investors just over £1 billion, as the Brexit vote spurred rather than discouraged investment into the capital.

A bounce back in investment

In Q3 2017 office investment volumes in the City rebounded, to stand at £2.3 billion. Overall, office investment volumes in London totalled around £3.4 billion in the same quarter. This heralded the fifth consecutive rise in London quarterly office take-up.

By the end of 2017, commercial property accounted for 13% of the value of all buildings in the UK, while total returns were approximately 5%. Some 29% of the UK’s commercial properties are now owned by overseas investors. When looking at the UK’s net wealth, commercial property accounted for around 10% of this figure by the end of last year.

Since the turn of the century, the value of the UK’s commercial property stock has increased by an average of 3% per year. Some 55% of commercial property is owned by investors, equivalent to £486 billion.

During 2017, London continued to be the dominant region with regards to commercial property, with 18.9% of the UK total. Only the South East – with 15.1% – came close. East London, which has become an increasingly popular hub for digital and tech companies and start-up space, witnessed £9.7 billion investment in commercial property throughout 2017, with 76% focused on office space.
What happened in 2016?

Before the Brexit vote the commercial property sector was going along quite nicely, but the shock result of the EU referendum did cause uncertainty and indecision in the immediate aftermath. In the days after valuations dropped, deals were put on hold and commercial property funds were forced to man the gates to stop investors leaving in their masses, but nerves soon settled, property funds reopened for business and valuations soared upwards again as people tried to take a business as usual approach to the new post-Brexit environment.

In a world of global uncertainty, low bond yields, oil price volatility and shock election results, investors were looking for certainty and stability – and London’s safe haven status helped to keep the UK commercial property sector competitive. Long-let City offices, retail space and warehouses (driven by an increased demand for online shopping) all offered investors the chance for a secure income.

The outcome of the EU referendum also had the unintended effect of making the UK more attractive to overseas investors. While the drastic fall in sterling was a concern for many, it made the UK particularly attractive to foreign investors, who could use the weak pound to their advantage while also benefitting from long leases and strong rental returns.

Continued growth in the future

The UK’s commercial property investment sector – which is the largest in Europe – is expected to have grown by 1.9% by the end of 2018. It is anticipated to rise again by 2% in 2019 and 1.8% in both 2020 and 2021.

According to RICS’ UK Commercial Property Market Survey for Q1 2018, there is a growing disparity between the strength of the industrial sector and the struggles of retail (as evidenced by the troubles major firms such as Next, Debenhams, New Look, Marks & Spencer and House of Fraser have been experiencing of late). Demand for industrial space is still solid and tenant enquiries for office space were up for the first time since the first quarter of 2016.

RICS’ research also found that the outlook for prime office rents is comfortably positive (net balance +38%), while both prime and secondary industrial markets continue to display stronger rental projections than all other sectors for 2018 as a whole.

In short, then, while 2018 might not be quite as bumper a year as 2017, the strong performance of office and industrial space should be enough to offset issues within the retail sector. And, with sterling still in decline, the UK’s commercial property sector will continue to remain attractive to domestic and international investors alike.