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Why and where in the world should you buy commercial property?

October 18, 2013Article by Ray Withers

Commercial property is often the backbone of major portfolios, but this asset class can sometimes be overlooked by individual investors as the entry values are seen to be ‘too high’. However, if you know what to look for and where to look, individual investors are easily able to add commercial property to their portfolios.

What is commercial property?

Commercial property can be divided into categories:

• Retail from small, independent boutiques through to shopping centres and outlet parks;
• Office buildings, which can include anything from a small single tenant unit to a skyscraper housing multi-national companies;
• Industrial units, such as warehouses and factories;
Hotel rooms, which is a booming asset class;
• Land, from off-plan land for development through to farm land; and more.

Commercial property offers a number of obvious benefits, including: long-term, stable tenants; low maintenance obligations; strong yields and possible capital growth. The diversity of commercial property can also be extremely healthy for an investment portfolio.

Commercial yields

It is worth noting that the yields on commercial properties are assessed differently than within the residential buy-to-let market. Commercial valuation is based on the certainty of the income stream, so the value is essentially worked out by the achievable yield.

Recent figures from the Investment Property Databank (IPD) show the UK commercial sector offering a gross yield of just over 6%. This is an attractive option in a low interest environment. Commercial leases are usually worked out on an upwards-only basis and, in the very worst case scenario, rents remain the same.

This asset class essentially taps directly into the economic health of a country, with regular increases in rent without the additional work of management, maintenance and placing of (residential) tenants.

The UK commercial property market

Award-winning Financial Times journalist, Tanya Powley, recently covered the asset class in her article titled ‘Time to add commercial property to your portfolio?’ She explains that, while the UK’s commercial property market remains varied, property in London is on the up and there are signs of market recovery across the board.

She writes: “Capital values rose 0.4 per cent in the second quarter of the year, halting an 18-month decline in which average values have fallen 3.5 per cent since September 2011. Experts say recent positive economic indicators are helping the asset class … the improved outlook and the attractive income returns on offer have encouraged private investors to take more interest in commercial, as opposed to residential property.”

Commercial agents cite retail as a favoured type of commercial property, as offices and industrial units tend to require more specialist knowledge and asset management capabilities. Some retail property in London, in particular, is selling at nearly twice the pre-sale guide price due to its further development potential. Experts and agents are also now looking to UK regions outside of London and even private banking giant, Coutts, has set up a real estate investment arm to cater to this booming sector.

Institutional investors might be happy to sit on the still low yields while the market continues on its gradual upward curve, due to the security and longevity in the deal. However, this might not be a preferred strategy for individual investors seeking a more immediate return. As such, global emerging markets provide a hot option.

Global markets

The outlook for 2014 is for commercial values to push even higher and for transaction volumes to increase across the board. DTZ, which has researched money coming into commercial property for the last 30 years, reports a global record of $340 billion available for investment in 2014.

Hans Vrensen, global head of research at DTZ, tells us: “With bond yield remaining low, most global property markets offer historically attractive relative returns. This attractiveness has helped raise an additional $24 billion over the last six months.”

Own commercial property in Billionaire Valley

Ray Withers, CEO of Property Frontiers, comments: “Back in 2007 we started looking to Mongolia, one of the fastest-growing world economies. The capital, Ulaanbaatar, became one of our best-performing investment destinations over a 4 to 5 year period, with many clients achieving capital growth of 300% and annual yields up to 24%.”

He continues: “Following on this success, individual investors now have the opportunity to invest in freehold high end retail units in The Village @ Nukht – a luxury western-style shopping and leisure centre currently under construction in an upmarket area of the city known as Ulaanbaatar’s ‘Billionaire Valley’.

“Units are available from $254,000, with expected double-digit rental returns of 14.8% NET, in addition to strong capital appreciation anticipated up to 20% per annum. We already have high demand for these units, so we urge investors to act quickly before this stage is sold out and the higher-price units come into play.”

Get in touch on +44 1865 202 700 to find out more about investing in commercial property.

Author

Ray Withers

Ray has over 17 years’ experience in the international property market and bought his own first international property investment back in 2002. Aside from running Property Frontiers, Ray has been involved in residential, hotel, student and commercial property investment and development in both the UK and overseas and co-wrote "Where to Buy Property Abroad - An Investor's Guide". As Founder and Trustee of the Frontiers Foundation, Ray is directly involved with many of its projects to ensure they have a direct and tangible impact in individual communities across the globe. He is passionate about property, travelling, scouting out new opportunities and finding time to spend with his young family.
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