Sharp decline in UK commercial property investment

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The amount of money flowing into UK commercial property fell across all sectors, particularly industrial, but also offices and retail, that’s according to market analysis carried out by debt advisory specialists, Sirius Property Finance.

And office values – secondary in particular – are still falling as the asset class comes under pressure from hybrid working and the heightened risk of obsolescence due, among other things, to low energy efficiency ratings.

However, despite commercial property investment remaining subdued in Q1, 2023, there is a more positive outlook for both industrial and prime office sectors according to MSCI and the Royal Institution of Chartered Surveyors’s (RICS) commercial property monitor.

RICS latest findings show that the sector has gone through a decline and continues to struggle with higher borrowing costs and a subdued UK economic growth outlook. This, the chartered surveyor’s professional body says, is particularly affecting demand in the ‘secondary office’ and retail parts of the market.

But the current RICS survey is more upbeat than the previous quarter’s with a majority of respondents still viewing the market in a downturn, but more respondents now feel that conditions are stabilising, or even beginning to improve.

The Sirius analysis

Sirius Property Finance carried out its own analysis of the commercial property investment market over the past six months. Sirius compared this directly to investment over preceding six months in order to get a full understanding of current trends in what is one of the UK economy’s most vital cogs.

Their research finds that in terms of money invested, the biggest decline has been seen in the industrial sector, falling by -55%. In the last six months, £2.9bn has been invested, down from £6.9bn in the six months before that.

Office space investment declined by -55% in the past six months, driven by a -63% drop in investment outside of central London. Despite this, office space is still receiving the highest amount of total investment at £3.8bn.

Meanwhile, according to the Sirius findings, retail & leisure declined by -45%, with this decline being driven by a drop of -75% coming in shopping centre investment, followed closely by a -74% drop in leisure investment.

In terms of the number of transactions, offices have seen the sharpest decline, falling by -44%, driven by a -64% drop in central London.

Retail & leisure transactions have fallen by -40% with shop units enduring the most severe drop of -47%. Meanwhile, industrial transactions have fallen by -35%.

The average amount of money invested via each transaction has also fallen across the board. The biggest drop has come from the industrial sector, falling -35% from £22m to £14.3m.

The average investment made into office space has reduced by -19%.

For retail & leisure the decline is -8%. This, however, is only saved from being a more dramatic drop by a remarkable 194% increase in the average transaction amount put into shop units which has risen from £5.4m to £15.9m in the last six months.

Kimberley Gates, head of corporate partnerships at Sirius Property Finance, has said:

“It has been a difficult six months for the commercial sector.

“It has been struggling since the start of the pandemic and the subsequent retreat from town and city centres, but now that additional economic uncertainty has been placed on top, the situation has worsened.”

She adds:

“Looking forward, the commercial sector’s recovery is going to be dependent on taking a more contemporary approach to space. While industrial units are likely to return to strength due to the immovable presence of e-commerce, retail and offices need to adapt to modern sensibilities.

“Mixed-use space is important – living, working, and playing in one multifaceted building, for example – but so too is a more experiential approach to physical retail, providing shoppers with something more than online retail can provide.

“We’ve seen how successful this can be with Barnes & Noble in America, and beauty brand Sephora across mainland Europe.”

RICS senior economist Tarrant Parsons said about their research:

“Although the picture across the UK commercial property market remains generally subdued in the face of higher interest rates and a soft economic outlook, the latest [RICS] survey feedback tentatively suggests that the most difficult period for the market may now have passed.

“Capital value expectations for industrial assets returned to modestly positive territory, having fallen sharply at the end of last year. This improvement has been supported by still solid occupier conditions across the sector, with demand for industrial space continuing to outstrip supply.

“Likewise, many of the more alternative sectors, such as aged care facilities, life sciences, data centres and student housing display a resilient outlook for the year ahead. By way of contrast, secondary office and retail properties continue to struggle, evidenced by rental and capital value projections remaining deeply negative, across both segments for the coming twelve months.”

According to RICS, tenant demand was -3% in the first three months of the year, a figure that’s a big improvement on -20% for the final quarter 2022. Industrial has picked-up for occupier demand, showing a net balance of 16%, compared with just 6% in Q4, 2022.

RICS found tenant demand “flat to marginally negative” for office space, with a net balance of -6%, and continuing to fall across the retail sector to -23% but this was less negative than in the previous quarter, and respondents were more positive about prime offices.

RICS says:

“Expectations turned from negative to slightly positive in both the prime and secondary portions of the industrial market. Across the prime office sector, values are now seen holding steady over the year ahead (net balance 6% vs minus 31% in Q4 2022), although expectations remain deeply negative for secondary office values (net balance minus 44% compared to minus 65% previously).”

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Reform and rate rises force investors to play the long game

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Landlords who are relatively heavily leveraged and achieving gross yields much below 5% could be better off reducing their mortgage balance than purchasing another property, according to new market analysis.

Hamptons’ annual overview of the rental market explains that higher interest rates mean investors need to focus on yield more than ever before. On paper, the average landlord now needs to be earning a gross yield in excess of 4% to turn a profit. This is based on a lower-rate taxpayer or limited company landlord who owns a £200k buy-to-let with a 60% LTV mortgage.

Maintenance costs

By contrast, in 2020, when rates were lower, investors could still make money with yields of 2%. Higher-rate taxpayers now need a yield of at least 5% to stay out of the red once mortgage payments, maintenance costs and tax have been accounted for.

For newer landlords, higher rents will help to maintain their margins, according to Hampton’s report, Rewriting the rules: have higher interest rates broken buy-to-let?

Capital growth

While some may historically have been willing to accept small monthly returns in exchange for the promise of stronger capital growth, tomorrow’s landlords will increasingly need to make sure their new purchase washes its face with some wriggle room each month, rather than relying on price growth to boost returns when they eventually come to sell.

It adds: “Taken together, higher interest rates and government reform of the sector is likely to make buy-to-let a longer-term game. Slower price growth will make it less tempting to sell up and cash in, while the additional time it takes to build equity means it will be slower to scale up. Therefore, we expect landlords who are buying today to own the property for considerably longer than an investor who bought in a decade ago.”

View Full Article: Reform and rate rises force investors to play the long game

Warning to approach ‘sourced deals’ with caution after PRS member expelled

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A company specialising in sourced property deals for investors has been expelled from the Property Redress Scheme (PRS) and can no longer trade legally.

Sourced Properties Group (SPG) Ltd, which was until now a PRS member, had been told to repay a sourcing fee of £8,000 it charged a client for a deal to run a property as serviced accommodation. The Manchester-based managing agent maintained that it was only subsequently discovered that the property’s owner had not given permission for it to be used as serviced accommodation, accusing SPG Ltd of not acting with ‘professional care and diligence’, a point that the PRS upheld following an investigation.

SPG was instructed to return the fee but has failed to do so and has now been expelled from the Government-approved redress scheme.

Misleading omission

A PRS spokesperson adds: “We found that there was a misleading omission by the agent, who had not acted with professional care and diligence. Our decision awarded the sourcing fee in full. We found that it would not have been that hard for SPG to find out that the property could not be used as serviced accommodation.”

But the PRS has told LandlordZONE that the case highlights a huge hole in the regulation of private rented market deals like this.

“It is not unusual for individual investors and firms to pay significant sums like this to access deals that are presented as promising or lucrative opportunities, but which can fall apart once the fee has been paid and, as in this case, the fees are non-returnable,” the PRS says.

Sourced deals

Redress schemes like the PRS and TPO are the only line of defence for those who feel their ‘sourced deals’ have not delivered the outcome promised. But under redress legislation, their only sanction is to negotiate with their members to pay awards to clients under threat of expulsion.

The PRS spokesperson urged investors to take on these kinds of ‘sourced deals’ only with extreme caution in order to prevent this kind of dispute arising.

View Full Article: Warning to approach ‘sourced deals’ with caution after PRS member expelled

Welsh government raises hopes of new energy cash for landlords

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Landlords in Wales could be in line for financial help to upgrade their properties after the Welsh government acknowledged that meeting new energy standards could be prohibitively expensive.

Responding to the Senedd’s Climate Change, Environment, and Infrastructure Committee’s report on decarbonisation of the private rented sector, it accepted that the introduction of revised Minimum Energy Efficiency Standards by the UK government might necessitate providing financial assistance for Welsh landlords. It explained: “If the UK government introduces a requirement to meet EPC C and does not provide financial support, there could be a need to look at funding grants and/or loans to support improvements.”

Ageing stock

The Welsh government agreed that the country’s ageing private rented housing stock means that landlords may be forced to take drastic action to meet energy efficiency targets. As a result, many will be forced to sell their rental properties, commission cheaper retrofits which may not be as effective over the long term or pass the costs of work on to tenants.

NRLA chief executive Ben Beadle says he’s pleased that the government understands the predicament of Welsh landlords when it comes to retrofitting rental properties, following extensive campaigning by the body.

Financial support

“The cost implications of undertaking remedial work on ageing housing stock are extremely prohibitive, with many landlords currently unable to access any kind of financial support for retrofits,” adds Beadle.

The NRLA has also called for the UK government’s “unrealistic” proposals for energy efficiency improvements in PRS homes to be pushed back. The proposed new rules mean landlords would have to reach an EPC C rating in 2025 for new tenancies and 2028 for all others, but the association believes it needs to go back to the drawing board to come up with sensible workable proposals, with an appropriate financial package behind them.

View Full Article: Welsh government raises hopes of new energy cash for landlords

The best service for Landlords who need to sell their properties

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If you’re a landlord who needs to sell their properties and is struggling, keep reading, because we have the best solution for you. No catch, no fuss, we simply know exactly what to do to help you.

You need to sell.

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Rent ‘reality gap’: London’s tenants are paying more than official data suggests

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Renters in the capital are paying 37% or £613 more per month than official statistics suggest, research reveals.

The findings from lettings and estate agent, Benham and Reeves say that high demand is pushing up rent prices –

View Full Article: Rent ‘reality gap’: London’s tenants are paying more than official data suggests

Welsh government says landlords need crucial financial help

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The Welsh government has acknowledged that landlords will need financial help to improve their rental homes to meet energy efficiency targets.

The announcement comes after all 29 recommendations of the Senedd’s Climate Change, Environment, and Infrastructure Committee’s report on the decarbonisation of the private rented sector

View Full Article: Welsh government says landlords need crucial financial help