Home Insights & Advice Rouzbeh Pirouz on why commercial property investment can still make decent returns

Rouzbeh Pirouz on why commercial property investment can still make decent returns

26th Apr 21 3:15 pm

At the time of writing, the UK high street is just about to finally reopen. This will come as a big relief to commercial property owners and those who have money in commercial property investment.

The UK’s economic recovery will be powered by an expected surge in retail sales, even with social distancing measures still in place. We saw a glimpse of this last summer when restrictions were temporarily lifted, and from April 2021 onwards we will see consumers buying at pre-pandemic levels.

Commercial property investment will get back on track in 2021

As the country gears up to return to some kind of normality, the vaccination rollout is helping to largely quell investor worries. We already now that the UK’s success in vaccinating a large swathe of the population so far is positively impacting the economy. Furthermore the Office for Budget Responsibility (OBR) predicts that GDP will increase by 4% in 2021 and that the economy will reach pre-pandemic levels by Q2 2022.

Despite all of the challenges presented by the pandemic, the general property market began to boom towards the end of last year. Residential prices were up due to the Government’s temporarily stopping stamp duty. However, by mid-2021 the Government will end relief, support and grants, including the business rates holiday. After this, commercial property owners and tenants will have to pay high rates again.

For any commercial property investors who own multiple properties, this could be a high cost. To this end, we’re already seeing landlords of commercial property attempting to future-proof their property portfolios. Waiting to see how well their commercial tenants fare when Government support ends is proving too risky for some.

Unfortunately, many companies have been forced to close down and won’t make it through the pandemic. Could this leave commercial property owners out of pocket as they lose tenants?

Commercial property landlords will need new ways to work with tenants

However, the combination of renewed optimism thanks to the vaccination is allowing many people to look forward to restarting their lives. And this includes going to the office or back to work on the high street. We’ll see more of this as the year progresses and particularly if, as the Prime Minister has promised, all restrictions are lifted from 21 June 2021.

The abrupt shift to near total remote working within the corporate sector has obviously been a major challenge for commercial property owners and investors. Companies around the world were forced to allow employees to work from home in unprecedented numbers.

This became what some have dubbed the biggest remote working experiment ever conducted, and it has pretty conclusively shown that employees don’t need to be in the office to be productive. And while some companies will be quick to urge employees back to the office, others are likely to see permanent remote working as a more cost-effective option.

Either way, employers are going to have to come up with a more flexible offering to their employees, many of which will want to continue working from home. This impacts their workspace and property strategies and means commercial property investors need to be ready to change it up. However, there will always be a need for commercial office space, and this won’t be completely replaced by remote working. Offices will instead need to become places of flexible collaboration, networking, creativity and learning.

There will be winners and losers among investors

Commercial investment isn’t going to be a winner for everyone this year. There will be winners and losers – as there always are. But the current market conditions and relative uncertainty surrounding the impact of the pandemic stretching through this year means that the sector’s dynamics are fundamentally changing.

Tenants and occupiers have more leverage than they did pre-pandemic, but there are plenty of ways commercial property owners can adapt to their changing needs. Both the retail and office commercial sectors are becoming polarised, and tehri future depends largely on how flexible they can be.

Those physically located in just the right locations and that can offer the flexibility tenants want will do well. However, commercial property owners who fail to differentiate their stock and insist on sticking to outdated commercial terms with tenants will undoubtedly struggle. Therefore, investors that want to make returns from commercial property must actively alter their offerings. Taking the leap into operating in partnership directly with commercial property occupiers is the best way forward.

There is still potential for a decent amount of overseas investment as well as from domestic investors. While Brexit is causing major problems within exports to Europe and with the border question in Northern Ireland, there is still a sense of optimism from international investors. The uncertainty of the past few years is, to a large extent, behind us and there is little chance of a general election for a number of years.

A new investment strategy is necessary for commercial property investors

Record low levels of interest rates will be important drivers of economic recovery in 2021. We’ll see this reflected in various subsectors, including build to rent (B2R), student housing and logistics/ warehousing. Online sales are now around 50% higher than before COVID-19, showing that the pandemic has vastly sped up the consumer shift towards online shopping. This will continue, with sharp increases in share prices for the likes of Amazon suggesting that this is no longer a temporary measure.

So, for retail and commercial office property, it will be a time of permanent change and urgent need for flexibility. We’re not going to see the high street go back to pre-pandemic levels, and we’re unlikely to see everyone return to the office commute. While the vaccination programme is going well, there are also warnings from the Government and the Chief Medical Officer Chris Whitty, that now is not the time for a reckless return to pre-pandemic lifestyles.

It’s essential that the move out of lockdown unfurls slowly and in a controlled way to avoid the possibility of yet another COVID wave and many more deaths. There’s no doubt that times are tougher for commercial property owners and that there is a pressure on the demand for office and retail space in particular.

This will need collaboration and communication and agreements between tenants and commercial property landlords. Commercial property investment is still a good way to make money for those willing to take risks and embrace the reality of a post-pandemic world. For now, much of the concerning news for property investors is in the price, but it’s vital to take a long-term view.

Office life will never be completely eradicated, and online shopping means far more call for logistics properties and warehouses. Either way, yields will remain competitive compared with income available from shares and bonds. Commercial property investment will still be alive and kicking for investors who are savvy enough to want to secure alternative income.

Rouzbeh Pirouz is Co-Founder and Senior Partner at London-based Pelican Partners, a real estate and private equity investment firm.

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