When to Invest in UK Commercial Property

Posted by Colliers on 2nd May 2023 -

The commercial real estate market in the UK is in a state of constant movement, particularly over the last 10 years including the GFC, Brexit, and latterly the pandemic.

That said, the market is extremely attractive to both domestic and international investors as it benefits from high levels of transparency, lower political risks, upward only rent reviews and comparatively longer lease terms compared with the US and other European countries.
 
The cyclical nature of the commercial property market means that the appetite for various investment prospects ebb and flow. Assets can broadly be split into four different types; core, core plus, opportunistic and value add. Each investor will have a preference which will be dictated by the position in the cycle, target allocations, risk appetite amongst others. In this article we will outline each type of investment, their timing within the cycle and their positives and limitations. 
 

Investing for the long term: core assets

Core assets are what we think of as stable, long-term prospects that require little capital expenditure (capex) and are relatively hands off in their levels of management. 
 
An example of an epitome core asset would be a grade A, fully let to a good tenant on a long lease term, city centre office building which will be purchased at a low yield. More generally, centrally located properties and with long term lease agreements fall under the banner of ”core” and are the traditional types of assets; offices, retail and industrial units. However, we have seen a lot more of the nascent sectors prove their stability including Life Sciences, R&D facilities and healthcare assets, moving out from under the banner of “alternative” and into the mainstream in recent years.
 
Investors may look to core assets in times of market or political uncertainty where strong covenants and long-income provide a relatively risk-free investment compared to other forms of investments (bonds, stocks, shares). 

There may also be investor-specific reasons to purchase a core asset such as a portion of their portfolio is likely to require capital expenditure in the future and the income from a core asset could offset that liability. These assets should ideally be secured at the bottom of a cycle to give your investment the best chance of gaining in capital value over the time period that you own this investment. 
 

Unlocking hidden value: core plus assets 

Moving slightly higher up the risk curve are core plus assets. These are the properties which require a small amount of asset management, capex or operational changes, but for the large part are stable and offer the potential of higher returns than core assets. For investors looking to be a little more hands on with their investment, core plus assets provide them with the opportunity to do so and with a lower risk profile than value-add investments. 
 
Examples of core plus assets include multi-let offices with opportunities for refurbishment or some vacant space or a retail park that is well performing but with lease events on the near horizon. 
 
Investors will look at core plus assets as relatively secure investments and will therefore look to purchase assets of this nature at any point in the market cycle, but they are perhaps more valuable in unstable or fluctuating market dynamics.
 

Hands on approach: value-add investments

Assets that require more attention and a significant amount of investment to bring it up to standard fall under the banner of value add. This can include a significant refurbishment, the addition of amenities or a change of use, all of which will improve the returns generated and increase the value of the property. Many shopping centres would be deemed value-add opportunities in today's market - often needing a complete overhaul in terms of use. These investment opportunities aren't for those who want to take a back seat as they need a strong asset management strategy, understanding of local markets and the build costs required to unlock the asset’s hidden value. 
 
Value-add investors will be seeking to acquire properties at a low point in their property cycle, whether this be due to low occupational demand, significant capex requirements or intensive asset management demand. By buying at a low point in the cycle the property will be sold at a discount to reflect the work required, and investors will seek to add value while holding the asset and sell the property at the top of the property cycle. 
 

Higher risk, higher returns? Opportunistic investments

Moving into the higher end of the risk curve are opportunistic investments, those properties that are bought at a low price, require significant financial investment and repositioning, before being sold for a profit. Distressed or stranded assets often need long-term asset management and may require significant debt or financing to undertake the works. Opportunistic investments have a longer time scale than the others mentioned above, however offers significantly higher returns when handled correctly. Investors with these types of requirements should be well educated in all aspects of the asset management process.
 
The optimum time in the market to acquire opportunistic investments is when the asset becomes obsolete in its existing use or a downturn in the market forces vendors hands financially. With an asset being almost worthless in its existing guise this allows investors to acquire the asset at a substantial discount, freeing up capital to reposition the property to create an attractive asset with value. 
 

Ready to invest? 

The commercial property sector offers a range of opportunities for investors, however considerable thought should be given to the level of asset management and the timing of the real estate cycle. While the above might seem daunting to a first time investor in the UK commercial property market, Colliers can help simply this process and assist you to make the right investment for your requirement.  
 
Each business has its own complex needs and if you’re uncertain about your investment decisions, talk to one of our experts here at Colliers: National Capital Markets. 

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