Commercial Property Investing in 2023
The markets have been in turmoil, inflation is skyhigh and interest rates are rising…..but I am very firmly of the view that where there are problems, there are opportunities!
This could not be truer than at the moment – the next few months could present the market we have been waiting for, and it has the potential to be the buying opportunity of a decade for commercial property investors.
Inflation is usually great news for commercial property as it’s viewed as a ‘safe haven’ for cash as rents rise with inflation with a commensurate rise in capital values. The reason why it’s different at the moment is because, as interest rates rise, it is affecting the cost of debt for commercial property. As a result, if you want to buy a property at a yield of, for example, 4%, and your cost of borrowing is now 8%, your property purchase is likely not to stack.
As a result many commercial yields are rising quickly and prices are falling – especially for prime property. Property sub-£1m is not being as affected at present as many purchasers are purchasing cash or with investor finance at that level, and finance for commercial conversions is more readily available.
Tenant businesses are also now nervous about 2023 and will be trying hard to get some flexibility in their leases as well negotiating down rents as much as they possibly can. The sector likely to be most hit will (again) be the retail market, especially those retailers that depend on the ‘discretionary spending’ of consumers. It’s likely that the secondary office market will also be further affected.
On top of all this there is the business rates revaluation in 2023, which will see rates for retail dropping, and those for industrial increasing significantly, as the effective date of the reval. is 2021.
The commercial property opportunity in 2023
We are seeing prices dropping….and there is likely to be more distress in the market as properties start to be refinanced in a higher interest rate environment, coupled with tenants starting to fail. Whilst this is obviously unfortunate, it could be a fantastic market in which to buy commercial property.
There are several things you can do to get ready for this opportunity……
- Get in cash – refinance, use your SSAS, find investors, sell property. Cash is king in this market as finance rates increase. Cash purchasers provide commercial vendors and agents with speed and certainty – and they are often willing to reduce prices in order to achieve this – especially if they are in some distress.
- Pick your niche – and stick to it. The absolute key to commercial property investing in 2023 will be to niche your strategies to obtain a competitive strategy.
- Build relationships – nurture relationships with commercial agents so that you can get in their ‘little black book- for off-market deals – and be the first in line to get the bargains
- Direct to vendor marketing – keep building your pipeline and nurture these relationships
The Top Five Commercial Property Strategies for 2023
My top five commercial property strategies for 2023 are:
- Microniching
- Distressed vendors
- Commercial to Residential and permitted development rights
- Commercial to commercial asset management
- Sustainability.
I will do further blog posts about each of these in turn, but for now I’m going to briefly talk about microniching.
Microniching
Microniching can give you a competitive advantage. It can also help you be utterly laser focused with your commercial property investing strategies.
Microniching is where global, national and local trends collide with your knowledge of commercial strategies in strategically-chosen investing locations. And, of course, you need available finance to be able to purchase these. The model I have developed is shown below, and shows the ‘sweet spot’ of micro-niching. There is a whole webinar on microniching on my website – CLICK HERE and I will talk more about microniching in future blog posts.
I will leave you with my top 5 tips for investing in the uncertain market we find ourselves in:
- Find motivated vendors….ideally make your money on the ‘way in’
- Don’t overpay – and make sure you can add value
- Make sure you do all your due diligence, always model multiple exits and run sensitivities on your numbers
- In this market ideally buy cash or have multiple debt / equity solutions to hand
- De-risk by niching, pre-letting, picking tenant type carefully, obtain income from day 1 and, if the property is already tenanted, make sure you built a relationship with the incumbent tenant and explore the art of the possible with them (do they want to stay or go, and can you regear their existing lease in some way?)
Most importantly, this is a market to watch very carefully and to make sure that you adapt and change with it. If you do, it genuinely could be the buying opportunity of a decade.
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