Seizing the Window of Opportunity:
Is 2024 Your Year to Invest in Commercial Property?
This article was first published in Property Investor News, January 2024
The year 2024 has dawned upon the commercial property market with a unique set of challenges and opportunities. Amidst an economic landscape where bond yields and interest rates continue to remain high, the cost of financing or refinancing commercial properties has surged. However, seasoned investors and astute market players recognize that within challenges lie huge opportunities that the masses just don’t know about. In this article, I’m going to delve into the factors contributing to the current market conditions and explore the top seven strategies to capitalize on the window of opportunity in the commercial property sector. If you want to achieve above average returns in markets with little competition – then read on.
Firstly, let’s look at the many reasons why Commercial Property is a great sector to invest in:
- Freedom from Residential Restrictions: Commercial property offers an escape from the myriad restrictions and regulations associated with residential investments in the UK market – commercial property is already highly regulated and, importantly, regulating commercial property further is not deemed to be a ‘vote winner’ by the major political parties.
- Strategic Diversification: Embracing commercial real estate presents an excellent diversification strategy, allowing you to broaden your investment portfolio strategically.
- Inflation Hedge: Commercial properties can serve as a robust hedge against inflation, thanks to the regular rent reviews often embedded in commercial leases.
- Permitted Development Opportunities: With the numerous Permitted Development (PD) rights available in England, you gain the flexibility to convert commercial spaces to residential or, indeed, to other commercial uses. The UK Government is also actively consulting on a raft of new PD rights, including the potential conversion of hotels and guest houses to residential, the widening of agricultural PD rights, and more flexibility of existing PD rights. (such as Class MA)
- Passive Income Potential: Some commercial (depending on the type of lease) has the potential to be the most passive income you can get in property. Full repairing and insuring leases (FR&I) mean that you hand the property over to the tenant lock stock and barrel, and they have an obligation to pay the rent, repair and hand the property back to you at the end of the lease term in the same condition as they took it, What’s not to like?
- Profitable Niches: The commercial property sector includes all types of property occupied by businesses – as a result, there are loads of profitable niches and microniches that the masses just don’t know about. There is a world of opportunity to take advantage of these in the current market, and beyond.
- Commercial Property Bounces Back First: In previous market downturns, commercial property has always bounced back quicker than residential. As long as you invest in the ‘right’ type of commercial property, there is no reason why this dynamic won’t be repeated in the current market.
Understanding the Market Dynamics:
Bond Yields and Interest Rates: The prevailing high bond yields and interest rates are at the core of the current market dynamics. Investors must understand the impact of these factors on the cost of financing or refinancing commercial properties. Current finance rates for commercial property are at circa 10%, meaning that commercial yields automatically have to rise to make investments profitable. Some investments coming up for refinance will have income that won’t cover the new finance costs, meaning that vendors will be more motivated to dispose of such properties.
Similarly, the risk-free rate, often measured by Government Bond yields, has remained at elevated levels ever since Liz Truss’s ‘mini budget’. Whenever this happens in the market, commercial property prices fall, as yields rise. While these conditions may seem challenging, they create a fertile ground for those who can navigate wisely, and also for cash purchasers.
Coupled with this, rents in some sectors (such as some retail and offices) have fallen, leases have got shorter, and rent-free periods have got longer – primarily due to supply and demand imbalances. This is only adding to the distress in some markets.
However, this is presenting an unprecedented opportunity in the commercial property market in 2024 – the ability to purchase properties at lower prices in a market where there is less competition.
The Top 7 Strategies to Take Advantage of the Window of Opportunity:
The Top 7 Strategies to Take Advantage of the Window of Opportunity:
- Microniching: Microniching is the only game in town! This involves focusing on niche markets within the broader commercial property sector. Investors can identify specialised markets with unique supply and demand tensions, and tailor their investments accordingly. For instance, properties catering to specific industries or emerging trends can present lucrative opportunities. If you truly want to make higher than average returns in markets with low competition, then spending some time to identify your microniche is essential.
- Distressed Vendors: Economic uncertainty often leads to distressed situations for property owners as interest rates rise and rents and values fall. Investors with the capability to identify distressed vendors and negotiate favourable deals stand to benefit, and acquiring properties during this time can lead to substantial returns when market conditions stabilise. Direct to vendor marketing and sourcing through administrators can facilitate this strategy.
- Commercial to Residential / PD Rights: Converting commercial properties to residential, or utilising permitted development (PD) rights (in England), can be a fantastic strategy in the current market. Class MA, Class G and the additional raft of proposed PD rights currently in consultation, can be a great way to repurpose uneconomic buildings and add huge amounts of value. Secondary offices, which have seen demand shrink post Covid, and retail are particularly suited to this strategy. In fact, one of the best opportunities in the commercial market over the next 5 years is likely to be to repurpose redundant offices into more viable uses.
- Commercial to Commercial Asset Management: You can make as much (or more) profit from commercial deals by keeping them as commercial as by converting them to residential. I have worked with many clients who have purchased properties to convert them but have realised that they can actually make better returns over 5 years by retaining commercial uses and asset managing – restructuring or extending leases, re-letting, reconfiguration of space etc.
- Retail: The retail sector, despite facing challenges in recent years, still holds promise for savvy investors. Whilst the masses believe that ‘retail is dead’, there are locations nationwide where it is booming – primarily because supply and demand is in balance and the customer catchments are wealthy. Understanding consumer behaviour and adapting commercial properties to cater to evolving retail trends can be a profitable strategy. Retail spaces that integrate experiential elements or embrace e-commerce trends also prove resilient.
- Offices: Remote working, fuelled by Covid, has turned the office sector upside down. Investors can capitalize on this shift by reimagining office spaces to meet the demands of a hybrid work environment. Flexible and technologically advanced office spaces are likely to attract businesses adapting to the changing nature of work. Similarly, conversion of office space to alternative uses can be a profitable strategy, particularly when PD rights are utilised.
- Industrial: The industrial sector remains a stronghold in the commercial property market. E-commerce and the logistics boom continue to drive demand for well-located industrial properties. Local Plans have not catered for enough industrial space in the future, and this presents a great opportunity to buy properties in this sector where often demand for space far exceeds supply. As prices are subdued at present, there is a great opportunity to enter this marketplace.
Conclusion: Seizing the Moment
In conclusion, the window of opportunity to buy commercial property in 2024 is a strategic playing field for those who can navigate the complexities of the market. The combination of high bond yields, interest rates, and economic uncertainty requires investors to adopt innovative approaches. Microniching, targeting distressed vendors, asset management and repurposing commercial property, can yield a significant competitive advantage in this market.
As the market evolves, it is imperative for investors to stay agile and adapt to changing trends. The retail, office, and industrial sectors each present distinct opportunities for those who can identify and capitalize on emerging patterns. By understanding the intricacies of the current landscape, and by getting in cash, investors can position themselves to not only weather the storm but thrive in the dynamic commercial property market of 2024.
To find out more about the Window of Opportunity in the commercial property market in 2024, you can watch my brand-new webinar at https://www.windowofopportunity.uk/woo-webinar.
