With interest rates set to remain lower for longer than was thought likely a year ago, investors are still searching to put their cash into yield-producing assets.
Private investors who, just a few years ago, looked to buy-to-let as a way to boost their pension pots are increasingly looking at commercial property as an alternative.
But, with looming fears about Brexit and the effect new technology is having on the way we live, work and play, it is becoming increasingly difficult to forecast both how much rent landlords can expect to receive from their purchases and how much they will be worth in a few years’ time.
Online shopping, high costs for retailers, outdated buildings and high debt levels are pushing down both rents and capital values for high street shops and shopping centres as household names, such as Debenhams and House of Fraser, struggle.
Earlier this year, high street retailer Next warned landlords that it would try to cut rents on the stores facing lease renewals by 22% and could close more than 200 stores over the coming 15 years if landlords refuse to offer big reductions. It was just one of a growing list of well-known retailers demanding rent cuts across their portfolios.
According to the most recent Investment Property Forum UK Consensus Forecasts report – which combines forecasts from 27 different property-related organisations – total returns for shopping centres and standard high street shops are set to remain well below the all-property average over the coming five years as traditional retailers continue to struggle to compete with their online rivals.
On the other hand, the IPF Consensus Forecasts is far more optimistic about the sort of returns likely to come from the industrial and logistics sector, which it expects to outperform the all-property index significantly over the next five years.
The IPF is particularly upbeat about distribution centres – large new business-build warehouses used by both e-commerce retailers and discount grocers to store and distribute stock.
“Further new logistics space is expected to be developed in the coming years, providing significant opportunities for developers that are able to meet this demand and a source of long income streams for investors seeking income,” says Malcolm Frodsham, director at Real Estate Strategies and the co-author of the report.
“The short construction periods and high proportion of development that is prelet are significant contributing factors to the low rental volatility in the sector. If this model of stock delivery continues, future rental cycles are expected to remain less pronounced than office rents.”
However, Frodsham points out that technology moves fast in this sector. Older distribution centres let to traditional high street retailers have a higher risk of tenant insolvency or CVA, which, given the large size of each building could have a significant effect on a small portfolio.
