My team of property tax specialists at Optimise Accountants have been taking a closer look at commercial property this week, as it’s been getting some bad press recently.
Confidence in the sector has been hit hard by the UK’s shock vote to leave the EU.
In the run-up to and immediate aftermath of the Brexit vote, I noted that investors rushed to withdraw money from commercial property funds, leading to several large funds being suspended and writing down their values.
The timing was unfortunate for the commercial property sector as it had only just returned to the health it was in before the financial crisis. I advised commercial property investment clients accordingly.
But fast-forward a couple of months, and things are looking brighter on the commercial property front, according to our team of commercial property specialists.
Suspended fund providers are announcing that they’ve reopened, or are about to reopen their funds, and economists are predicting Brexit may not be quite as bad for the City of London as previously thought.
The closely-watched IPD real estate index, compiled by MSCI, showed that while UK commercial property values fell 2.8% in July, they fell by just 0.6% in August, indicating the pace of the slowdown was easing.
For those who invest in large-scale commercial properties via funds, this all sounds like good news, and my portfolio of commercial property investment clients have been upbeat in recent weeks as a result.
But what about the growing number of private investors considering direct investment in commercial property on the back of the negative tax changes to residential investing?
For a start, if we look at the results of auction giant Allsop’s first commercial auction since the referendum, it would seem that interest among this group was not immediately adversely affected by the Brexit vote. In its July 6 auction Allsop sold a healthy 82% of the lots, an increase on the previous July, when it sold 80%.
The commercial property sector is broadly broken down into three key sectors: offices, industrial and retail. I think it’s relevant to take a quick look at each sector.
Following the UK’s vote to leave the EU, a number of large, international companies have threatened to move staff to other European countries, so there may be a drop in occupancy rates in large office spaces, particularly in London.
In fact, if you invest in a property with a local accountancy firm or legal firm as the tenant, it’s possible they will thrive as the UK’s exit from the EU will bring about a number of changes that will increase the need for their services. Talk to me if you’re considering this option in the near future.
The retail industry has generally fared well since the Brexit referendum, with the Office for National Statistics reporting that after a short dip in June, retail sales rebounded in July, rising 1.4%.
Figures from the British Retail Consortium for the same month were similarly promising, and it said the 1.1% growth in July suggested shopping patterns for the month were unchanged from previous years.
Of course nothing is clear yet about what will happen due to Brexit, so investors would be wise to look at retailers that can withstand a recession. Discount retailers such as Lidl and Aldi fared well after the global financial crisis, and non-optional services such as funeral directors and pharmacies are also steady bets in times of economic uncertainty.
The industrial sector includes things such as warehouses and distribution centres, factories and storage centres. There is a shortage of industrial space in the UK and I expect this to be exacerbated by demand from e-commerce businesses as the trend towards online shopping grows.
If the weakness in the pound continues, we could see a surge in exports, which would further increase demand for industrial premises. On the other hand, businesses’ costs may increase due to the weakness of the pound. I believe that commercial property investors have a fantastic opportunity in the making.
Whatever sector you choose to invest in, it’s more vital than ever that you undertake due diligence on the current tenant occupying any commercial property you’re considering.
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