Rouzbeh Pirouz on Investing in commercial property as the UK emerges from the pandemic
Entrepreneur and businessman Rouzbeh Pirouz on why there are still plenty of opportunities for investing in commercial property in the UK in a post pandemic world.
Rouzbeh Pirouz is Co-Founder and Senior Partner at London-based Pelican Partners, a real estate and private equity investment firm.
Investing in commercial property is still a viable investment opportunity, regardless of the impact of COVID-19. As you’ll see as we work through the benefits of investing in this space, opportunities for investors are now increasing.
While both residential and commercial real estate investment can make you money, there is typically a higher return on the latter. Of course, it’s not without risks, even in non-pandemic times. And as we begin to emerge from the worst impact of the COVID-19 pandemic, let’s go back to basics on commercial property investment and why it’s a good plan for the savvy investor.
Why investing in property is still a viable way to make good returns.
There are pros and cons to investing in commercial property, and these have shifted during the pandemic.
Commercial property, in general, refers to a collection of real estate used for different purposes, including:
- Retail outlets/shops.
- Office buildings.
- Industrial buildings.
- Warehouses/logistics buildings.
- Apartment buildings.
- Mixed-use buildings, combining apartments, office and retail use.
Each type of property needs contrasting management and offers the investor diverse returns.
Commercial property offers the potential for steady income.
Before the pandemic, statistics show more potential for earning higher returns through commercial property than residential. However, if we consider that retail and office property, in particular, have been hit hard by the pandemic, the short-term outlook right now in the UK is different.
Experts forecast that until 2025, residential property returns may outweigh commercial property, particularly when it comes to retail and office. The average annual return on investment (ROI) investors can expect are as follows:
- Retail: 1.6%.
- Office: 3.3%.
- Industrial: 4.5%.
- Residential: 5.2%.
Commercial property investors must look at long-term returns rather than base decisions on the short-term impact of COVID-19. We are already beginning to go back to offices, and, of course, restrictions were lifted in the UK on 19 July 2021.
While returns are lower than pre-pandemic figures, plenty of innovative development are emerging that focus on mixed-use town centre properties. These will provide a long-term return that will undoubtedly continue to increase.
In addition, the industrial and warehouse/logistics subsectors have expanded directly because of the pandemic. With a sharp increase in online shopping for all kinds of goods and services, warehouse space is at a premium and therefore offers increasing returns for investors in this sub-sector.
The goals of tenants and investor landlords are aligning.
It’s in everyone’s interest that business continues to thrive no matter the external threats. So, while retail was shut down under lockdown, commercial property owners and investors could work with the tenant to ensure that the business survives.
This symbiotic relationship can be a real bonus for investors who become commercial property landlords. The loosening of planning restrictions by the Government over the last year has also made it much simpler to convert usage of a unit.
So, for example, a unit that was previously retail only can be converted into a hybrid shop/café with no need for planning permission. This all works in the commercial property landlord’s favour ultimately.
As I’ve touched on above, the pandemic hit commercial property in the UK hard. The sector has taken a hammering from office workers being sent home to the disruption caused to logistics and industrial operations. But its resilience shows just why it’s a good bet for investors.
Commercial property investors are relatively unscathed by the pandemic.
Figures show that investors have come through relatively unscathed. For example, FE Analytics data shows that between 1 January 2020 and 1 July 2021 (which encompasses 16 months of the pandemic), the average trust in the Association of Investment Companies (AIC) UK Commercial Property sector is up 0.8% and the average fund in the Direct Property sector is down 1.6%.
And there’s more good news. Having survived the harshest impact of the pandemic, commercial property investors can look ahead to a relatively optimistic future. While inflation rising is concerning to some, commercial property historically performs well during times like this.
Demand will increase as the economy expands, pushing rents up. Therefore, commercial property investment is a sensible hedge against inflation. In many cases, leases include an inflation link so that investors/landlords are guaranteed more income if the cost of living increases.
Commercial property sub-sectors are shifting in importance.
However, investors should lookout for the most promising sub-sectors of commercial property. Restrictions are now lifted, and this is positive for the whole economy. However, some sectors of commercial property will benefit faster than others.
Industrial, commercial property is the stand-out winner for the short and long-term investment prospects. There will be only modest growth in capital values in the near term as rental growth prospects remain depressed outside of the industrial sub-sector.
Therefore, right now, investors in some areas of the UK’s commercial property sector will naturally be feeling more optimistic than others. Retail has endured an acceleration of trends that were already in existence before the pandemic. This includes a sharp step away from bricks and mortar retail.
Online e-commerce has risen from below 20% before the pandemic to reach a peak of just over 36% by January 2021. Currently, it’s at around 30% and far above pre-pandemic levels even as lockdowns are lifted. We’re seeing big names leaving the high street and brands going into administration.
However, there is a strong reason to believe that retail and hospitality will bounce back hard, as people are unleashed on a high street they’ve been forced to keep away from for so long.
Parts of commercial retail remain strong.
There remain parts of the retail sector that are strong, including out of town retail parks which continued to do well even during the lockdown. In addition, food retailers, DIY and discounters all continued to make a strong trade throughout the pandemic.
As the UK begins to recover from the pandemic, consumers will still want everything that made their shopping experiences in out-of-town retail outlets positive. This includes the convenience, the parking and the prevalence of big brand names at affordable prices. This will likely remain complementary to online shopping, rather than dying in favour of it.
Within the office sector, there remains an uncertainty. Many businesses are wary of keeping the same amount of office space in the face of an uncertain future. There has been a widely shared idea that remote working will continue for the majority, inevitably downsizing office space.
However, the Government is now urging people to head back into the office, so this could mean the majority will return to working patterns from before the pandemic. Either way, landlords can adjust to the new demand and remain in a favourable position.
Flexible working and hot-desking are not new trends, and the most likely scenario is that most businesses will return to this. Even if there is more remote working on the table than before, the likelihood is that office space requirements will level out to pre-COVID levels before long.
After the uproar of the last 18 months and the fears expressed by some commercial property investors, it’s more likely than not those opportunities will increase exponentially. Property investors are well-positioned to take advantage of the new normal and post-COVID recovery.
However, it won’t all return to the same dynamics as before the pandemic. Commercial property dynamics are changing, and the most significant investment winners will be those focusing on the future of the structural transformation of the broader economy.
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