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Competition for Commercial property heats up

Commercial property update

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Property expert Nigel Lewis explains how supply shortages and increasing demand are stimulating the commercial property market.

‘The earliest indicator in any economy, in my opinion, is not consumer confidence, jobs, house prices or exports. Instead, it is the demand for industrial property. It’s simple really – a diversifying and growing economy drives demand for space from companies seeking room to make or store more products’ says Nigel Lewis, property expert.

This is often the earliest indicator of growing business confidence and economic activity. For example, the Royal Institution of Chartered Surveyors (RICS) recently highlighted how its commercial property demand index is two to three quarters ahead of official employment statistics [1].

At the moment, commercial property is in 'robust health' [1]. Perhaps you'll be aware of this if more of your clients are asking for funds to help them buy new space for their expanding businesses.

They are up against the big institutions, though. The number of investors putting money into commercial property at the moment has almost reached 2006 (or pre-financial crash) levels, according to Savills [2].

The increased demand for industrial units from UK and international investors, as well as UK companies, is making it difficult and increasingly expensive to acquire such properties, particularly if they are in a prime position. This is a challenge that varies in intensity depending on which sector, kind of property or region you look at.

RICS chief economist Simon Rubinsohn believes prices and rents for commercial property will rise during 2015 and beyond, possibly by up to 10% [3]. He says the number of companies seeking space is at its highest since 1998 [3].

Knight Frank believes much of this demand is being driven by the expanding logistics industries as people increasingly shop online. Demand for property within this sector is particularly strong in the Midlands and the North West, it says [4].

That's because investors, facing reducing yields in London, have been looking further afield for better returns. This is pushing up capital values as both businesses and investors compete to buy property. Research by Savills shows that all commercial property is rising in capital value at the moment [2].

One thing I love about the commercial property market is how similar it is to the residential one. Take the North East, for example. A recent Knight Frank survey [5] within the region reported rising commercial property prices, a lack of new units being built and, as companies competed for space, rising rents.

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  1. RICS UK Commercial Property Market Survey, February 2015 .
  2. Savills website, ‘UK Commercial Market in Minutes’, March 2015 .
  3. RICS website, press release, ‘Bullish mood in commercial market continues to strengthen’, July 2015 .
  4. Knight Frank website, ‘Logistics & Industrial Capital Markets Update, Winter 2015’ .
  5. Knight Frank website, ‘Logic North East H1 2015’ commentary .

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