The State of Commercial Property – Expectation Vs Reality
We entered 2023 prepared for recession, faced with escalating interest rates and higher levels of inflation; anticipating extremely challenging market conditions for the foreseeable. However, when it comes to property investment, even with a more challenging landscape as a whole, it’s fair to say commercial property has challenged many expert predictions in the early part of 2023.
Whilst it was anticipated that there would be significant declines and revenue predictions remained ambiguous, the reality in the first quarter has presented much greater stability than expected. A recent Deloitte survey collected expectations from 450 CFO’S from major commercial real estate owners and investment companies, highlighting that 12% are expecting no changes in revenue, 48% are expecting some decreases and the remaining 40% are expecting increases.
Although these numbers on their own don’t make investing in commercial property appear to be the most appealing prospect, it’s clear that there is some significant promise and long-term investment opportunity in the aftermath of Covid19 and in light of rising inflation.
Understanding Commercial Property
Commercial property refers to any property used for the purposes of making profit or facilitating any form of business activity and includes a broad spectrum of property types including buy-to-let properties, offices, retail stores, agricultural buildings, warehouses, factories and more. One of the major advantages of owning commercial property stems from the potential to generate revenue. A commercial property may be essential for business operations e.g. a retail unit, may generate monthly income in rent e.g. a buy-to-let property, or provide a long-term investment opportunity where the focus is on selling the property for profit as value appreciates over time.
With careful research and proper management, there is no doubt that commercial property can provide a lucrative investment opportunity, but is now really the time to invest?
In this blog we explore the market conditions, opportunities, and some of the most important considerations for property investors in 2023.
1. The Bricks and Mortar come back
It comes as no surprise that Covid-19 has had a significant impact on retail businesses, forcing them to close during the lockdown and ultimately resulting in a decrease in rental income for many commercial property owners. For retailers, a shift online and a new focus on e-commerce, created promise and became the only solution for survival. Many even questioned whether they’d ever need a bricks and mortar store again.
However, as our lives adjust in a post-Covid world, industry sources are increasingly suggesting that there has been a boom in commercial property and more interestingly the way we buy. Looking specifically at retail there has been a huge up-turn in pop-up retail which represents a £1 billion industry in the UK and perhaps even more interesting, positive signs of a growing trend back into bricks and mortar shopping experiences.
2. The Buy-to-let Opportunity
Buy-to-let mortgage statistics from the ONS suggest there are around 2.74 million landlords in the UK who declare income from rental property. But even with this vast number of buy-to-let properties, there is still a significant shortage in rental stock. This combined with a slowing market, a predicted fall in prices and the anticipation that the market will recover in the next five years, could present a significant opportunity to pick up a bargain now and profit in the longer term.
Alongside buy-to-let, In the past five years, the number of build-to-rent (BTR) properties in the UK has doubled, with the sector now accounting for 7% of all new-build homes.
An important consideration
Although the prospect of buying a home, enjoying the short-term income from monthly rent payments, and all whilst looking forward to longer-term profits you might generate from selling, may sound too good to be true. But it’s important to consider that if you are selling your buy-to-let property and it hasn’t been your main residence, you may need to pay capital gains or corporation tax for the profits you make on the investment.
3. Energy Performance Certificate Changes
Energy efficiency is also set to play a significant role in the reality of commercial property for 2023. Standards are set to improve with tighter regulations surrounding EPC’s (Energy Performance Certificates). An EPC rates buildings on their energy efficiency on a scale of A to G, with A being the most efficient and G being the least.
But new changes are in play!
From April 1st, 2023, a landlord won’t be able to continue to let a property that has an EPC rating lower than ‘E’ without a legitimate reason. Any properties with a rating lower than ‘E’ will be deemed sub-standard. Estimates suggest that there are around 1 million properties which will be affected by this EPC change, with only 15% of commercial buildings* currently being rated B or above. This means that whilst landlords might have some work to do, the standards of commercial property will extensively improve.
As commercial property building standards improve and become more efficient, the market will expand, and a slew of other initiatives such as accelerating the production and affordability of low-carbon heating systems will likely support this change as well – another reason why now could be the time to invest in commercial property!
4. New Investment Opportunities
There are also new investment opportunities for commercial property in 2023! Despite rising inflation and interest rates, the industrial real estate industry demand is growing. Industrial buildings like warehouses are needed more than ever before and demands are expected to continue to grow far beyond 2023. This is a great investment opportunity if you’re interested in the industrial sector.
And the opportunities don’t stop there! After the government published a white paper called ‘A Fairer Private Rented Sector’ back in June 2022 proposing a new deal to ensure fairness and affordability to renters, the demand for affordable housing continues to increase. Landlords will start looking at how houses can meet new requirements which will likely resolve in private landlords selling up – leading to the reduction in the overall stock of private rental properties.
Is now the perfect time to invest?
There really is no telling whether now is the right time. Whilst there is always opportunity to capitalise when the market is in decline, no investment of this scale comes without it’s associated risks. It’s also important to acknowledge that there are lots of uncontrollable factors at play in 2023, making it difficult for even the most experienced in the sector to make accurate predictions.
Our advice? Do your research, take your time, and ensure you have the right professional support to protect your investments as much as possible.
Are Howard and Over’s Commercial Property team the team for you?
If you already own or lease or are in the process of buying or leasing a commercial property in the Plymouth or Ivybridge area, The Howard and Over team could be just the team you need. With extensive local knowledge, a significant amount of commercial property experience ranging from complex commercial contracts to business leases, through to every aspect of the sales and purchasing process, we are on hand to support you every step of the way.
Speak to Claire and the commercial property team today to get started
