Investing in Commercial and Retail Space
Over the last few years, we have seen a rapid decline in high streets across the UK. This is not only in deprived areas but also in other affluent parts of the country as well, and it is very sad to see. There are a number of reasons for this. Large supermarket chains make it difficult to compete and the out of town superstores and shopping centres have been hammering nails into the coffin and instrumental in the death of the High street as we knew it. There is little need to go to the town centre these days. Banks and post offices have shut down thousands of branches in town centres. Many of the big brands that have gone out of business starting in 2009 with the closure of Woolworths.
Since then we have seen other big names disappear including BHS, Blockbuster, Mothercare, Maplins, Borders, Staples, Tie Rack, Barratts and Poundworld. Add that to the number of small independent retailers that have closed. Shoe shops, butchers, bakers, newsagents, clothes shops and many more have all gone, leaving charity shops, coffee shops, hairdressers, nail bars and beauty therapists to rule the roost.
Then to compound this, online retailing has seen exponential growth in recent years and further exploded during lockdown as this was the only option and this trend has not declined since lockdown ended and is still seeing solid growth. Millions of people, many who until recently, had never bought anything online preferring to visit the shops, were busy clicking away on Ocado, Amazon and a multitude of other online stores.
When lockdown ended, while retail outlets saw an initial boost, footfall has dropped back and it is clear that many people are continuing with their new online shopping habit.
What About Investing in Commercial premises?
When it comes to investing into commercial properties owning and renting retail outlets may not be the best way to invest in properties at this time due to the reducing numbers of retail businesses. The latest strategy is applying for change of use from commercial to residential. Investors and developers are buying up commercial units enmasse, and converting them into residential properties.
Due to the high demand and short supply of housing in most areas, the councils are often very affable when it comes to reclassification and change of use for these properties. The major changes to the general permitted development order in 2015 that were announced by the government, made it much more straightforward to change the purpose of a building from commercial to residential.
The cost to acquire commercial properties compared to residential is generally lower and, as some conversions won’t require planning permission, though you will still need prior approval from the local council and certain conditions may apply, they have become more popular with investors.
The buildings must be 150m2 or less, you will, of course, have to comply with building regulations and, if you plan to extend or change the look of the exterior, you may well need planning permission. There are of course risks with this strategy, especially with high street properties. These buildings tend to be older and were not always built to the same standard as residential houses. This makes the conversion and complying with the latest building regulations far more difficult.
Add to this the latest energy efficiency requirements that are now being enforced requiring rental properties to reach a ‘C’ on their energy performance certificate which can be a lot harder to achieve.
The cost of building materials, timber, concrete, bricks, sand and cement has shot up in recent months with some things like steel nearly doubling in price. With such an unsettled market there is no telling where prices will end up, making it much harder to work out an accurate budget and calculate your profit.
In summary while there is money to be made in commercial property, with the low demand for retail space, the increased cost of building materials for a conversion, the new imposed energy ratings requirements and the impending raise in interest rates this may well be a strategy to steer clear of at least for the next 4-5 years, possibly longer!
What some of our clients have to say…
I’m originally from Leeds but now live in Australia working as a university lecturer. It’s always been our aim to ultimately move back to the UK so I’ve taken an interest in the UK property for many years. I’m also very aware of the lack of accommodation for students close to major universities. A friend recently put me in touch with Sterling Woodrow and it was instantly apparent that these guys knew their market so my wife and I finally decided to invest.
First time investing into a fully managed investment. I made an enquiry online boasting 10% returns per annum. Within a few days I received a call from one of the portfolio managers Ben, who was extremely helpful and wanted to understand more about my goals and what I wanted to achieve than actually trying to sell the product which was a breath of fresh air. I received all the info and had lots of questions regarding the Hotel Investment, all of which he answered simply and easy to understand.
Whether you live overseas or in the UK if you want to invest in property it’s important to find an agent that will go the extra mile for you and that’s exactly what Sterling Woodrow did for me. Although I knew a lot already it was still good to have those guys available when I needed them and it didn’t cost me anything.
Investing in Office Space
Investing into office real estate was generally reserved for the larger or institutional investors due to the high cost for office space. This has changed in recent years as a number of real estate investment trusts (RIET’s) have sprung up offering the smaller investor the opportunity to buy into this, and other types of commercial and industrial real estate investment deals.
Office space has been a very profitable investment for many years, this is due to the relatively low build cost, compared to residential housing for example, and like all other commercial and industrial properties they are traditionally let on a long term basis from 10 to to 30 years, and predominantly leased on a full repair and insure (FRI) basis.
This means that the tenant is responsible for the repairs, maintenance and upkeep for the full term and has to put everything back to the way it was when the lease was first signed.
Unfortunately, Covid-19 rears its ugly ahead yet again and office space is another real estate investment that has taken a big hit. Thousands of people who were forced to work from home for months have decided that they prefer it and have continued to do so with the blessing of their companies.
Once the companies realised that it did not affect productivity and, in some instances, productivity drastically improved, coupled with the huge saving in overheads means they have been happy for their staff to carry on working remotely.
Then there are the thousands of companies that have unfortunately ceased trading leaving millions of square feet of office space standing empty in nearly all major cities across the UK. As the economy takes a nosedive this is not looking to improve anytime soon.
Another thing to consider when looking at office space is capital appreciation which is much slower than residential. If you are thinking of investing in office real estate then take great care with your due diligence. If the property you are interested in investing in is already rented, make sure that there is a considerable time remaining on the lease, we would suggest at least 5 years based on the current situation, and also do your own thorough background checks on all of the existing tenants.
This is another investment strategy that might be worth staying clear of for the next few months or a year while we see how things progress. If companies continue to go out of business at the current rate then this could be a sign for trouble in this sector.
For more information about Commercial and Retail Investment contact Sterling Woodrow.