Is Commercial Property Likely To Be An Attractive Investment in 2011/2012?

Commercial property has historically been regarded by investors as a sound investment option, from both capital and rental yield perspectives.  Certainly, in robust economic climates commercial property has often been the cornerstone of commercial investment portfolios.  Indeed, pension funds (from large scale group investment-led schemes to self invested personal pensions, or SIPP’s) and other similar, commercially sensitive, investment funds have often regarded commercial property as a reliable investment, as opposed to more unpredictable investments such as stocks, shares, bonds and the like.

However, events over the last few years have shaken confidence in commercial property investment, particularly as potential investors have experienced increased reluctance on the part of lenders to make funding available and in many cases cash flow issues (often resulting from rental voids and tenant insolvencies) have resulted in many investors exiting the market place or consolidating existing portfolios, with the intention of riding out the storm.

Following the UK officially entering recession in January 2009, investors quickly demonstrated a rapid decline in confidence in commercial property as a viable investment, resulting in what became an increasingly common sight – large office, retail and mixed use developments which had been completed prior to the summer of 2008 being essentially ghost towns of unlettable commercial units.

What followed was an inevitable increase in personal and corporate insolvency and investor confidence falling to an all time low.

The commercial property market proceeded to stagnate, resulting in a sharp decline in commercial property values and potential investment yields.

The flip side to the coin was that many of the larger commercial investors specialising specifically in owner management of large commercial property investment portfolios were subsequently able to release their substantial cash reserves, making them well placed to take advantage of a struggling market place.  So long as these cash investors were ‘in it for the long haul’, many felt that it was a good time to enter the market place.

And they were, of course, correct. So whilst commercial property investment preserved in some quarters, the majority sat in the shadows, waiting for the right opportunity to come along…

And it would seem that those opportunities are now starting to present themselves more readily.

The last few months have seen a slow but steady country-wide increase in commercial property investor activity.

Seemingly, prices and potential yields are now starting to increase and show signs of sustainability and there are now viable deals to be had in the market place.

Coupled with increasing lender confidence, the commercial property market is starting to show some, albeit tentative, signs of recovery.  However, current signs are that the market place is still waiting for that ‘colossus’ to come along, that deal which signifies the beginning of the end for the commercial property downturn and its resurgence to former glories.

Therefore, it is this writer’s opinion that as the UK pulls itself further away from the constraints of what has been a particularly deep recession, the commercial property investment market should continue to strengthen in 2011, so that by the end of the year going in to 2012 we should see increasing numbers of investors returning to the market place, backed by increasingly confident lenders.

James Burgess

Solicitor, Commercial Property Department

MKB Solicitors LLP

July 2011