Commercial property yields woo investors

by: Charles Haresnape, group managing director, mortgages, Aldermore
  • 26/04/2016
  • 0
Commercial property yields woo investors
While it is well known that London real estate commands a significant premium over property in the rest of the UK, what can be less obvious is the gap is closing, writes Charles Haresnape, Aldermore's group managing director, mortgages.

Residential property tends to grab the lion’s share of the media headlines, however, data from over the last year indicates that increasing numbers of investors are looking to shift their focus onto commercial property.

The UK commercial property market has shown extremely strong growth in recent years, particularly as the lack of availability of office space continues to contribute to rising rents, and investment volumes for 2015 totalled £67.5bn.

The attraction is simple: investment returns from commercial property were in double digits in 2013, 2014 and 2015. With many analysts expecting a slower rate of growth in the value of assets over the coming year, we are likely to see investors switch their focus to increasing rental yields from their properties, particularly through refurbishment work.

Commercial property as an asset class offers an additional income stream to the capital appreciation of the property itself in the form of rental income. Recent research from Ernst & Young showed that commercial property rents in London have risen by an average of 70% in the last five years, and in some areas in the Capital this figure rose as high as 181%.

There is a wide variety of opportunities outside of London, as investment in the so-called Big Six cities carries with it a lower initial capital cost. Some £3.2bn was channelled into commercial property in the Big Six in 2015, the highest level since the 2008 financial crisis.

The situation has improved as the economic picture has brightened, and as demand for both commercial and residential space grows, property owners feel more comfortable investing in their future and looking for ways to increase rental incomes.

While commercial property is certainly not without its risks, current supply pressures are likely to continue to make both commercial, semi-commercial and residential developments a worthwhile investment.

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