Where Does the UK Commercial Property Market Stand Right Now?

on Oct 5, 2016
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The recent state of the UK’s economy has led many investors to be unsure of what is really happening in key markets. Commercial property investors, in particular, may be recalling the days of the financial crisis without an ounce of fondness. Before the downturn had even hit, in 2007, the sector delivered negative returns. In 2008, the year the credit crunch went from a worrying prediction to unfortunate fact; negative returns in the sector were over 20%.

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Now that the UK economy is once again experiencing difficulties and another downturn is being named as a possible consequence of Brexit, commercial property investors are understandably concerned that this may be the template the sector is once again set to follow. However, it is important to consider the position in which the commercial property market currently stands – a very different position from the one it occupied at the time of the 2008 crisis.

For a start, the sector is entering whatever difficulties may come from a strong position. It may have delivered a markedly negative return in 2008, but returns have been positive in every year since. For the past three years, and for four years out of the past six, these returns have reached into the double digits.

While it is true that predictions for returns in 2016, as of the start of the year, had fallen out of double digit levels, there was still a positive sentiment surrounding the market with a lot of optimistic predictions among forecasters and plenty of confidence that returns would remain positive. What level those returns were expected to reach exactly would depend on who you asked, but most forecasts were somewhere between 5% and 9%.

Many of the factors that have contributed to the renewed strength of commercial property in the years since the crisis are still in place, and don’t look likely to disappear in the near future. Primarily, the strength of commercial property in recent years has been supported by record low interest rates (which have recently been cut even further from already-record lows), growth in the UK economy, and low levels of inflation. Strong levels of demand from investors also helps to shore up the market, and at present investors are continuing to be attracted to commercial property for its relative stability, a greater level of certainty than many of the alternatives benefit from at present, and the continued expectation of good returns. Many funds, institutions, and larger-scale investors have reduced their activity in the sector due to the uncertainty of the referendum, but much of this demand has been picked up by smaller-level investors taking the opportunity to fill the gaps and by international investors enjoying more favourable exchange rates.

That being said, it would be foolish to ignore the fact that investor sentiment has taken a knock following the referendum, and as a result so has investment activity. While some of the lost demand has been picked up by other groups, there has still been a significant net outflow of funds from the sector. In the shorter-term, this is likely to hold back the sector and knock, if not rental returns, then certainly capital growth. However, there are still many positive factors bearing on the sector right now, and the property market is expected to be an area of relative stability as the full implications of Brexit are worked out. In the longer term, most analysts remain confident the sector will continue to deliver.

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