Waves of political and economic uncertainty have become something of a norm for markets in recent years. Against a backdrop of significant events – from US-China trade tension to Brexit – investors are taking extra caution with their asset allocation. We’re also seeing volatility creep back into markets as central banks reassess their supportive monetary policy.
The macro-environment has affected sentiment towards most asset classes, notably equities, bonds and commercial property. Against this backdrop though, UK commercial property remains a desirable investment that is attractively valued relative to other key asset classes.
In the face of this uncertainty, UK commercial property has stayed the course well.
A range of factors contribute to this resilience, including the current supply-demand dynamics in London. The constrained supply of offices in the capital against a high demand for office space is unlikely to shift and this continues to attract investors. By comparison, there is a perception that commercial property in the key cities in mainland Europe, such as Paris and Frankfurt, are fully priced.
There is also strong demand in the regions, which have seen an increase in inward investment as development in major regional cities continues.
In recent years, the weaker pound, affected by Brexit uncertainty, is another factor that has attracted overseas investors to UK real estate.
So how does the commercial property outlook compare with that of equities and bonds?
Equities
Firstly, UK commercial property can be a compelling long-term investment opportunity amid returning volatility in equity markets.
Volatility returned to the stock markets in October last year, shocking investors as they began to wrestle with the potential end of easy money from central banks. Following a decade of easy money from central banks investors had become comfortable with the asset class heading primarily in one direction – up. Whilst market moves have since settled down, speculation that we could see the end of the equity market bull run soon remains. Investors have now been reminded that equity returns are not guaranteed and are taking caution.
This puts alternatives like commercial property increasingly on the map.
UK government bonds
In comparison, UK government bonds are considered lower risk yet low-yielding investments. We continue to see a hunt for yield as investors seek out better returns amid disappointing bond returns.
UK commercial property returns are relatively attractive compared with UK bonds and the sector is benefiting from this yield hunt. UK commercial property is also often said to have “bond-like characteristics “ with longer leases, upward only rent reviews, full repair and insuring leases and the concept of dilapidations.
Corporate bonds
Investing in corporate bonds can also present an opportunity for attractive yields and dependable income. If a company performs well and investors have confidence in its outlook, they can benefit from the bonds it issues. Corporate bonds are generally considered a riskier investment than UK government bonds, deemed to be more likely to default on debt than stable governments. This can cause some investors to pause for breath.
Yet there is an opportunity to gain access to these companies’ revenue growth and success without purchasing their bonds – via real estate investments. Large companies like Amazon are significant tenants in commercial properties – from logistics to office blocks – across the UK. Where tenants are reliable and businesses you might invest in, it is worth considering investment opportunities in the office blocks or logistics sites they occupy. The yields of those entities’ equivalent bonds are usually significantly lower. Strong companies make for strong tenants and likely guaranteed yields.
Equities and bonds have had investors second guessing themselves in recent months. The macro economic environment is only heightening this caution.
By comparison, returns from commercial real estate are looking attractive. Fundamentals of UK real estate remain strong and the proposition of yields on UK commercial real estate investments remains an attractive one for investors when compared with other asset classes. Commercial property can offer a long-term investment opportunity to shelter from economic headwinds.
Commercial property is expected to stay the course through this period of uncertainty.
