They say that a week is a long time in politics, but for Liz Truss a month seemed far too long, beaten as she was by the lettuce. Whilst the financial markets are now starting to stabilise following the turbulence caused by September’s mini budget, they are now eagerly awaiting Prime Minister Rishi Sunak’s November budget which, as of the date of writing, has not yet happened. However, the UK Government and the Bank of England now appear to be much more aligned, and this will hopefully bring much needed political and financial market stability.

Nothing can hide the fact, however, that economic growth has stalled and the UK economy is now on the brink of recession with households facing rising mortgage costs, higher prices for essential items and a rise in energy bills which will stall spending in 2023.  This is a time when the Bank of England would usually be cutting interest rates to support the economy, but the current huge inflationary pressures mean that there is no likelihood of that happening any time soon.

The commercial property sector is now operating within the context of a second economic contraction in three years, a rapid rise in the cost of commercial debt and high inflation, exacerbated by the ongoing long-term structural shifts in tenant demand precipitated by the pandemic – with retail being the hardest hit. 

Activity in the upper echelons of the commercial market – at price points of circa £5m and above – has all but ground to a halt and the market is in a holding pattern waiting to see where the balls now land.  Economic uncertainty, together with current pricing, has raised the risk profile of many investors, and commercial property yields are now moving upwards. There is now a massive gap between the expectations of purchasers (for lower pricing and higher yields), and those of sellers who are not yet willing to take a discount on price. This, of course, often happens in markets at this point in the cycle and will take some time to wash out.  However, according to Savills’ recent research report, ‘commercial markets are repricing fast, and price discovery is happening more quickly than we have ever seen before in a falling market’. 

Transactions are taking much longer as both purchasers and financiers are forensically analysing risk and, in some sectors such as the industrial market, many deals are falling out of bed as the relative yields in that sector compared with the current price of government bonds makes prime properties look risky and expensive.  It is also noticeable that many properties in the auctions now have reduced reserve prices as sellers rush to offload investment properties prior to a market downturn – many may have already missed the boat.   

Occupier demand across all sectors is down as tenants figure out what’s happening in the market. Tenants are now being risk averse and will be using the current market conditions to their advantage in lease negotiations.  Sectors which are linked to consumers (such as discretionary retail spend), as well as offices, will most definitely be further impacted by the economic turbulence.

A glimmer of light is the recent fall in the price of sterling which overseas investors will use to their advantage to invest in UK real estate.  UK commercial property is still seen as a ‘safe haven’ for those from unstable economies, and overseas investors could start to prop up some elements of the higher end of the market. 

So that’s the bad news out of the way…..let’s now focus on the positives and what can be done to maximise the huge opportunities that the 2023 commercial market will present!  I’ve detailed out below the top 3 ways I consider that investors can look to prepare themselves for what could be the buying opportunity of a decade.

1. Choose your niche carefully

The severity of price reductions will vary by sector and location, with secondary and tertiary properties inevitably being the hardest hit.  Choice of stock and method of purchase will be absolutely key to making money in these uncertain times.  

Regular readers to this column will know that I am a massive fan of niching investing strategies to obtain a competitive advantage (there is a whole webinar on micro-niching at www.commercialpropertyacademy.co.uk). Niching is more important than ever in times of economic instability as we want to be investing in assets where you can continue to add value, where the asset continues to align with long-term trends, and, ideally, we want to invest in properties that will be amongst the first to recover post-recession.

One of the many benefits of investing in commercial real estate is that there are many profitable niches that you can invest in, many of which are not generally known to the masses.  A higher (commercial) yield environment could present an opportunity to enter markets that were previously unaffordable.

I would strongly recommend that you look carefully at the supply and demand in your chosen niche.  Although commercial finance rates will be unlikely to go back to the low level they have been over the last few years, once the finance market starts to recover, choice good stock selection will provide you with the best chance to be able to asset manage your assets to add value and capitalise on financing out the benefit that will bring.

2. Buy cash

This recession will be the third such market that I have experienced, and it is always the cash buyers that are able to take advantage the opportunities on offer.  And it doesn’t take a rocket scientist to work out why – as the commercial finance market locks up it will become increasingly more difficult to obtain money from the banks, who will be fanatically pedantic with their risk management.  Buyers who are reliant on debt will also find it increasingly difficult to compete due to the increased cost of finance. Speed and certainty will be key to vendors, and only cash purchasers can really provide that.   When I worked for a REIT in the corporate world back in 2008, cash purchasers bought the pick of the crop, and some made their cash back very quickly once the markets started to recover. 

Now is a good time to start to get in cash – finding investors or partners, liquidating assets, completing refinances, or selling property.

3. Nurture relationships

A large proportion of commercial property deals are transacted off market and relationships with those selling commercial real estate is essential. If you don’t already have established relationships with commercial agents now is the time to start to build your credibility with them so that you become a buyer of choice when the time comes. It’s also a great time to start to do some direct to vendor marketing campaigns to position yourself when some vendors start to feel more distress due to an inability to refinance or are exposed to tenant failures.

Whilst now is not the time to be rushing into doing transactions there are several things you can do to prepare for the market we’re going into in 2023. Time will tell how far the markets will fall but there is no doubt in my mind that there will be some fantastic opportunities for purchase if you prepare yourself correctly.