The UK’s commercial property market has attracted investors from around the world for decades, with strong yields and steady price growth luring both private and institutional investors to the UK’s shores.
When the pandemic struck, the situation changed rapidly. Previously busy office blocks were suddenly left empty while shops and leisure facilities were shuttered – meaning many tenants were unable to pay their rents or renew their leases. Many were understandably concerned that the commercial market would never return to its previous glory (particularly not in the city centres), meaning commercial property was no longer a solid investment for overseas investors.
Fortunately, the reality has been very different.
The recovery of the UK’s commercial property market
The UK’s commercial property market has shown signs of impressive recovery, with demand for commercial tenancy and rents growing in many areas. Not all commercial assets are created equal, and the pandemic has affected asset types differently, meaning recovery is stronger in some areas than others. But as one recent report puts it, the scene is generally positive:
‘All-property rents grew by 0.8% month-on-month in March, according to MSCI. Year-on-year rental growth rose to 3.8%, a step up from February’s 3.1% advance and the highest increase since the first half of 2016. Office rents increased by just 0.1% month on month for the fifth month in a row, keeping the annual growth rate at 1.1%. In contrast, industrial rents rose faster than 11% year on year – that testifies to the continued strong demand for warehouses and logistics.’
A commercial property report from RICS – the Royal Institute of Chartered Surveyors – paints a likewise positive picture, noting that:
‘Across the UK, a net balance of +32% of respondents reported an increase in occupier demand at the all-sector level. This is up noticeably from a reading of +16% in the previous quarter and marks the strongest return for this indicator since 2015.’
Is commercial property still worth owning – and what type of commercial asset is best to invest in?
The last few years have undeniably been turbulent – and the level of demand for certain types of commercial property has changed as a result. It’s unlikely, for example, that offices will ever be quite so full of workers as they once were Monday through Friday. But as many businesses have realised, bringing people together physically has a value that can’t be replaced. Even if offices aren’t full every day, businesses need spaces big enough for all their people to come together. So, commercial property has ultimately proved fairly resilient and is continuing to offer high yields to international investors.
This is backed up by our own experience. As brokers of commercial property mortgages, the Articus Finance team has interesting insight into international investor sentiment regarding UK property. In terms of the type of commercial property, we’re seeing huge demand for warehouse and industrial space across the UK. This asset class weathered the storm of the pandemic very well, and continues to be popular with investors from around the world.
In general, there’s slightly less demand for retail property – but office space has made a better recovery than many would have predicted, as many businesses confirm that employees will be required to be ‘back in the office’ at least several days a week. The research from RICS supports our experience:
‘When disaggregated, the industrial sector continues to post the strongest pick-up in tenant demand, registering a net balance of +60% this time (virtually unchanged from +61% in Q4). Significantly, respondents cited a clear upward shift in demand across the office occupier market in Q1, with the net balance improving to +30% from -3% beforehand. For the retail sector, the occupier demand indicator moved into relatively neutral territory at -1%, compared to -23% in Q4.’
Commercial property mortgages for overseas investors
Property value and demand for tenancies are important considerations for commercial property investors. But likewise important is the availability and cost of commercial property mortgages, as this could have a significant impact on profit margins.
In terms of availability, many lenders are willing to offer commercial property finance to overseas investors. While some lenders withdrew from the market during the early stages of the pandemic, many have returned, and there are still many specialist lenders who are happy to offer high-value commercial property mortgages to overseas clients. Typically for overseas clients, these will be commercial investment mortgages rather than owner-occupier mortgages.
In terms of the cost of finance, like many economies around the world, interest rates have risen in the UK over the last year. This trend is set to continue as inflation bites. Accordingly, commercial property mortgages are slightly more expensive than they once were. However, yields for commercial property are usually higher than other asset classes, which is generally offsetting this price increase – particularly if you work with a specialist broker who can negotiate for a good deal on your behalf.
Looking for a commercial property mortgage?
If you’re an overseas investor, arranging a commercial property mortgage in the UK can be complicated and time-consuming. Our brokers are experts in securing specialist finance for overseas investors and can guide you through the process to achieve a favourable outcome.
Speak to an Articus broker to learn more about our commercial finance services for overseas investors.
