Property BondsUK Property MarketApril 4, 2022by NewCapitallink0How good an asset is commercial property?

Prior to the pandemic, the prospects for property investment appeared promising. When compared to the revenue from shares or bonds, the income from investing in high-quality offices or warehouses was substantial. Most lease agreements in the United Kingdom were based on frequent upward-only rent reviews, often every five years, allowing the income to at least keep up with general inflation.

While it has been true for some time that there were concerns about a lot of retail property, particularly in town centres, as too many stores pursued too few shoppers, people were still drawn to shop investment in high footfall regions such as airports, train stations, and the best big city centers.

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Today, the reported yields on commercial property continue to provide a compelling case for investment. When a typical UK government bond yields less than 1% and world equities yield less than 2%, prime UK property yields are believed to be around 5% for offices and 4.5 % for industrials, with retail rates currently significantly higher.

If you think current rent levels were likely to stay the same, they would be very appealing returns to secure through your investment. However, it appears more likely that rent levels will fall in a variety of property kinds and locations.

Premium positions at travel hubs are currently out of favor because tourism and commuting have dropped, and no one knows what levels will resume once the plague has passed.

Hotels and leisure businesses are unsure of what the new regular level of demand will be once the lockdowns are lifted. Owners of student housing are concerned that future generations of students will choose to attend a university that they can access from their parents’ homes, or that they will mostly attend online.

Property

The news about rent collection levels in many High Streets and other commercial property estates in the UK remains bleak. Due to the lack of an instant legal challenge from landlords, many tenants are requesting an early review of their rent levels and withholding payment in the interim.

Many retail tenants like the idea of a turnover-based rent, where they only pay when they do business.

Some have renegotiated 0% rates, while others have bargained prices ranging from 2% to 12% of turnover, depending on location and prospects.

In impoverished locations, landlords may be required to accept zero rent in order for the tenant to pay the business rates and other expenses that would otherwise rest on the owner if the building sat unoccupied. Office rents have fared better thus far. Many businesses are still operating at pre-pandemic levels, albeit with the majority of employees working from home. Large City Centre offices are empty, but the tenants continue to meet their commitments and expect to return to more office activity in the future.

The longer employees are absent from their offices, the more uncertainty there must be about future work patterns and the type of office space companies will require. It is currently fashionable to believe that the pandemic provided a one-time boost to trends that were already growing prior to the crisis. Employees want more flexibility in their work, family, and leisure hours. Many people believe they want to work a few days a week in an office and the rest of the time from home. Employers frequently reach the same conclusion. Some do so because their bosses enjoy the mixed week as well.

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Others do so because it appears that the talent they require will be more picky about working hours and location.

So, what is the purpose of the office? The new solution is collaborative time. When you need to work as a team, discuss fresh ideas, or collaborate closely with a colleague on a difficult task or project, this is the place to go. It’s also where you’d go to meet clients and suppliers, plan events, and oversee the technology that powers both the office and homeworking.

If this becomes a common model, it appears likely that firms will want less total office space in city centres and will require better home and office connected technology. It may also continue the flowering of the suburbs and more rural areas beyond the cities, as employees buy more property with better surroundings for a lower price than in the centre city, and as firms set up satellite offices with access to the local river, hotel, and restaurants for some collaborative working.

All of this implies a significant amount of effort to determine new office property values. It will also almost certainly imply significant landlord and tenant investment in new office space fitting out, with less emphasis on everyone having their own 5 days a week workspace and more emphasis on team areas and meeting rooms. Of course, this can only be the way forward once the virus has been tamed, as Covid-19 drills are currently hostile to hot-desking and shared technology.

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For some time, we have been urging caution on property other than logistics and technology space.

Residential property has emerged from the crisis well bid, as the stamp duty holiday has combined with the desire of some to buy more space outside of cities and congested areas. Property experts are slow to form a new view of what the market will look like or how pricing will develop, and many funds have been locked owing to an absence of reliable valuations.

Property should be an ideal asset for long-term funds, providing consistent income growth and a relatively stable capital value outside of bad recessions. Today, we are still waiting to see how the Great Reset affected relative values.

It is also likely that landlords will face increased pressure to green their properties as businesses demand ever-higher standards of insulation, air quality and flow, and low carbon counts on the heating and cooling systems deployed. The structure that a company uses always makes a statement about it. More people will want to make indelible statements demonstrating their commitment to environmental imperatives and the social awareness that employers must now demonstrate. These are all property costs, as well as uncertainties, which means we still don’t know what future rents and returns will be on much of the stock that has been impacted by the pandemic.

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