November 30, 2023
There seems to have been relentless economic headwinds driving across the UK recently, from Brexit to government instability, a global pandemic to devastating wars, and inflation to a cost of living crisis. But from the chaos comes change, and often unexpected consequences.
As covid changed where we live, how we work and how we shop, Brexit impacted businesses, trade and supply chains. Both of which have made the outlook for Commercial Property pretty bright.
Why we think the CRE market is on the up:
- The Commercial PropertyAn asset, normally to be held for the long-term and to produce an income, and / or Capital Growth. Examples include; Hospitality (hotels), Retail (shops), Leisure (pubs), Student Accommodation, Medical (GP Surgery), Light Industrial (Shed / Logistics), Heavy Industrial (Manufacturing Plant), HMO (House of Multiple Occupancy; e.g. Bedsit), Office, Care Home / Retirement and Educational (University / Private School). market has been relatively flat since 2015/2016, so there is plenty of investment firepower ready to come off the backburner
- The mass-exodus of multinational businesses from the UK was less severe than predicted
- The pound is still relatively weak when compared with historic averages, so international investors are still buying at a significant discount
- Commercial property owners aren’t selling as they have nowhere else to invest, so supply is short
- Despite steep interest rateThe proportion of the overall Loan that is charged to the Borrower as Interest by the Lender. This is normally expressed as an annual percentage of the remaining loan. increases, borrowing is still readily available
- Whilst we are no longer part of the EU, European banks will still continue to lend to UK borrowersThe person, persons, or commercial entity applying for the Loan from the Lender. in the CRE market
Where we think the main opportunities exist:
1. LogisticsAs a Commercial Property type this refers to properties used as distribution centres; think of an Amazon warehouse. and storage space
You only have to look at the painstaking decline of the British High Street to know that online shopping is ruling the retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. world, and more so since the pandemic. In 2019, the Office for National Statistics reported that online spending contributed to 18%-20% of total UK retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. salesReferring to the sale of a property. We use the term in Development Finance and Bridging Finance to describe the Exit Strategy the Borrower expects to use to repay the Loan.; by 2022 it was 26%, and is predicted to increase to be more than half (53%) in the next 10 years.
More online shopping means there’s big demand for storage space, or ‘sheds’ as John Lewis refers to its logistical campus of super-warehouses, aptly named Magna Parks 1-3, which occupy 1.96m sq. ft. of commercial real estate space, with another million thrown in for Waitrose for good measure. Amazon’s biggest fulfilment warehouseUsed as a description of a property class in Commercial Property. Think of the huge storage Warehouses and logistic centres used by supermarkets and online retailers. Also known colloquially as a 'Shed'. in Tilbury, Essex stands at 2m sq. ft.; a considerable upgrade from the first space they purchased in 1997, standing at a paltry 93,000 sq. ft.
It’s not just storage for shopping though. Supply chain problems caused by Brexit, and partly the Russo-Ukraine war, caused building material prices to soar, prompting builders/developers to bulk buy materials to achieve better pricing (and pricing certainty) from suppliers. Therefore the need for warehousing next to major ports has surged.
But if mega-sheds aren’t within your budget, there are far more attainable options for savvy Commercial Real Estate investors. The growth of businesses that operate out of small officesUsed in Development Finance and for Commercial Mortgages, to describe any asset which is to be used as office space. and outsource their storage has been significant in recent years, so facilities for self-storage as well as light industrialAs a Commercial Property type this could refer to Warehouses (or Sheds) used for storage and logistics. An online shopping storage depot would be a good example. warehousesUsed as a description of a property class in Commercial Property. Think of the huge storage Warehouses and logistic centres used by supermarkets and online retailers. Also known colloquially as a 'Shed'. are hot property. As a developerAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project., you can pre-sell or pre-let the space relatively easily, de-risking the lenderA company or person that lends money to another. early on, enabling you to find far cheaper funding.
2. Flexible office space
Whilst the never-ending covid-19 lockdowns were wholly miserable for many, it spurred remote working and a generation of digital nomads able to live and work from anywhere (a pretty ironic legacy!). Hence the demand for flexible office space. According to Savills research, take-up has grown incrementally each year since the pandemic, with Greater London and South East region seeing growth of 159% and 130%, respectively when compared to 2013–2017.
As well as demand, pricing has increased by 15% in H1 of 2023 compared to last year and flex operators are benefiting from reported occupancy levels of 88% in London. There are also plenty of operators looking for space, opening up significant opportunity for CRE investors.
As an operator with no experience, it’s a tricky market to get right but can be a real cash cow if you’re prepared to offer tenantsA person that occupies a property owned by somebody else, and pays rent for that privilege. more flexibility. One way to offer this is by dividing up the space and offering 12-month rolling contracts, rather than longer termThe period of time agreed between Lender and Borrower, at the end of which the Loan should be repaid or an extension negotiated. Also known as Loan Term. contracts to one or two anchor tenantsA person that occupies a property owned by somebody else, and pays rent for that privilege.. Although running costs are higher and the management process is more intense, the returns are higher too, and we’ve seen clients achieving 50%-100% more than the average market rent by taking this approach.
Funding can be difficult, especially with the main clearing banks, although through experience we have relationships in place with lendersA company or person that lends money to another. who like this kind of deal. A proven track record with the assetAn item of property owned by a person or company, that has a value and could be used as Security for a Loan. you’re financing, or similar assetsAn item of property owned by a person or company, that has a value and could be used as Security for a Loan. run as flexible office space goes a long way. If you’re developing or re-furbishing, we can also look at a three- or four-year deal that allows the work to be carried out, followed by an income stabilisation period; meaning a higher rate for the work period, which decreases as revenue milestones are reached.
3. Rethinking retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. space
As retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. flounders in town centres, business rates rise and former High Street legends stand as empty shells, it’s clear that the future of our retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. space needs dramatic a rethink. The Government’s 2019 £1 billion Future High-Streets Fund, didn’t make much impact, especially as high-streets were further deserted during covid-19. A far more significant shift is needed in how the space is better used, and housing secretary Michael Gove announced plans in July 2023 to make it easier to convert unused retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. spaces. Outdated five-storey department stores should be making way for mixed-use developments with a residential element, and smaller units that combine to offer an experience and a destination.
Savills is a great example of a company already tapping into this. It recently secured planning permissionOfficial permission from a local authority to build or alter a building. at Queenslie Park industrial estate, for a large-scale mixed-use, 250,000 sq. ft. development projectThe Site or Property that a Developer wishes to improve or re-build, in order to add value. It is quite common for someone to refer to a 'Development' instead. in Glasgow. The scheme will comprise distribution, industrial, commercial, storage, retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. and hospitalityAs a Commercial Property type this could refer to Hotels, Pubs, Restaurants, or other Leisure related industries. space, with a gross development value of £25m. Of course, this is major money, but mixed-use retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. space on all scales poses a huge opportunity going forward, and in our opinion is already one to watch for those looking for new opportunities in a dynamic Commercial PropertyAn asset, normally to be held for the long-term and to produce an income, and / or Capital Growth. Examples include; Hospitality (hotels), Retail (shops), Leisure (pubs), Student Accommodation, Medical (GP Surgery), Light Industrial (Shed / Logistics), Heavy Industrial (Manufacturing Plant), HMO (House of Multiple Occupancy; e.g. Bedsit), Office, Care Home / Retirement and Educational (University / Private School). market.
For advice on securing finance for Commercial PropertyAn asset, normally to be held for the long-term and to produce an income, and / or Capital Growth. Examples include; Hospitality (hotels), Retail (shops), Leisure (pubs), Student Accommodation, Medical (GP Surgery), Light Industrial (Shed / Logistics), Heavy Industrial (Manufacturing Plant), HMO (House of Multiple Occupancy; e.g. Bedsit), Office, Care Home / Retirement and Educational (University / Private School). development, please get in touch on 020 7846 0184 or email info@propertyfinancegroup.com
November 2023
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