Sarem Eddie Kerman on the challenges and opportunities within UK commercial property right now

Sarem Eddie Kerman on the challenges and opportunities within UK commercial property right now

Sarem Eddie Kerman is Investment Director at London-based Pelican Partners, a private equity and real estate investment firm.

The hits keep coming for the UK economy. Reeling from the pandemic, retail, hospitality and construction were just starting to get back on their feet when supply chain issues have reared up.

So, while earlier in the year it appeared that the biggest investment opportunities in commercial property lie in the industrial subsector, is that still the case?

Industrial continues to dominate investment opportunities in UK commercial property

According to a report from CBRE Group, Europe will need to provide around 300 million square feet of warehouse and e-commerce distribution space to meet demand over the next few years.  

While e-commerce was already becoming stronger even before COVID-19, the pandemic and subsequent lockdowns pushed it into the stratosphere. Consumers turned to online shopping for everything, from food to clothes, medical supplies and household necessities.

For e-commerce behemoths like Amazon, this has been great news. In May 2021, Amazon announced just how much it was able to capitalise on the pandemic through its sales for Q1 2021 – $105 billion. That’s a 44% increase over the Q1 2020, before the pandemic hit the world towards the end of March.

This increase in sales gave Amazon a profit of $8.1 billion, which is an increase of an enormous 220% on the year before. These figures are important when we look at the commercial property market, as the demand for warehouse and distribution centres soared in line with online sales.

E-commerce sales will continue to increase around the world

E-commerce sales are expected to increase by $1.5 trillion at a global level by 2027. And this means an extra 1.5 billion square feet of commercial logistics/warehousing property will be needed around the world.

All of this strongly indicates that property investors should now look at warehousing and logistics for opportunities in the coming years. The asset class is now becoming much more popular, and as a sector will continue to do so. Rents will rise as online businesses battle to find warehouse space to store their products or distribution centres to fulfil them.

At the height of the measures in place to contain the pandemic, other commercial property sectors did less well. Inevitably retail and office space were far less in demand, causing them to perform less well for investors.

Diversification is key, however. Investors should gain access to the subsector through REITs, but they should beware those valuations are currently elevated. The strength and speed of the growth in industrial commercial property have been in response to profound shifts in consumer behaviour in light of COVID-19.

But investors must be sure that they trust this sector to continue to perform for the long term.

Investors should include commercial real estate as part of a diversified portfolio

Despite price elevations, the distribution and warehouse sectors will offer decent opportunities for investors to make returns. It’s absolutely understandable that investors are wary right now, given the enormous changes the world has had to endure over the past year and a half.

Some areas of property investment feel less secure than others right now. For example, offices are still not yet at full capacity. There remain questions over the corporate sector and whether employers will demand 100% pre-pandemic attendance in the office or will stick with some form of hybrid or remote working.

Depending on how this pans out, the commercial office property sector will obviously be affected. It’s still too early to tell exactly how this will all play out, particularly in the UK. Currently, the UK has the highest number of new COVID-19 cases in the world, and it’s not beyond the realms of possibility that there will be a further lockdown of some kind.

In the meantime, property investors must remain selective. There are, of course, opportunities available. However, this doesn’t mean that making money in the current climate from commercial real estate will be easy. It’s best to consider commercial real estate as part of a wider investment portfolio.

Demand grows as supply stalls for warehousing space

According to Knight Frank Research, it’s estimated that the UK will have to find an extra 92 million square feet by 2024 to meet the continuing rise in demand for online goods. However, right now there isn’t the supply to meet this, with the report explaining that there is around nine months of available stock left within this sector.

This shortage in stock means that rents will continue to rise in the short and medium term, and for investors that’s good news.

While we wait to see whether consumers will flock back to retail, entertainment, hospitality and the office to pre-pandemic levels, it’s worthwhile for investors to be cautious.

Three major property sectors remain at the centre of the COVID-19 storm – retail, office and hospitality – and there could be a permanent reset in some of these areas. Despite this, property advisor CBRE estimates that the property market in the UK will make a stronger recovery by the end of the year than initially predicted at the beginning of January.

It suggests that UK GDP will return to pre-COVID levels by the end of 2021, which is around half a year earlier than initially predicated. And, because real estate in the UK is extremely diverse, it absolutely has a place in a carefully diversified portfolio.

Challenges always mean opportunities for investment, and in 2021 being a property investor means far more than being restricted to retail, office or old-school industrial. There is now residential, logistics, fulfilment, care homes and digital infrastructure in the mix too.

Some investors are leaning far more heavily into logistics and leaving behind the days of commercial office property. Diversity and selectivity are the watchwords for property investors looking for long-term yields in these uncertain times. 

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