Commercial property opens its doors

Public interest in commercial property investment has soared in recent years and is expected to increase further according to the RICS’ (Royal Institution of Chartered Surveyors) annual commercial property forecast published today, (06 April). Commercial property returns are continuing to attract individual private investors with total returns in 2005 remaining close to 20% for the second consecutive year.

Overseas investors have been the dominant force in the market in 2005, taking over from domestic institutional investors the previous year and accounting for £15 billion or 30% of all purchases. Buyers from the Middle East have been particularly active as rising oil revenues have increased spending power. UK institutional investment accounted for £11 billion of all direct commercial purchases in 2005, though net investment receded to £2 billion after peaking at £4 billion in 2004.

2005 also saw the return of equities as the front running asset class with returns outstripping those of commercial property for the first time since 1999. However, the advent of UK Real Estate Investment Trusts (REITs) (given the green light in the recent UK budget) is expected to further entice retail investors into commercial property funds through tax sheltered personal finance vehicles, such as Individual Savings Accounts (ISAs) and Self Invested Pension Schemes (SIPPs).

Suggestions that a tightening of the borrowing rules governing SIPPs could hurt the investment market are dismissed by chartered surveyors who, in a recent RICS poll, said that the changes would not affect the market place or appetite for commercial property in pension plans.

RICS forecasts a decline in total commercial property returns in 2006 and 2007 – 17% and 9% cent respectively – as a result of a slowdown in purchaser activity.

RICS economist Oliver Gilmartin said:

‘The doors to commercial property are opening up to a much wider audience and individuals are beginning to appreciate that this kind of investment can generate income whist exposing them to comparatively reduced risk. We are seeing a rush into tax sheltered savings plans from those wishing to diversify their portfolios and spread their investments across different asset classes and geographical areas.’

‘However, while the next two years will continue to see healthy returns for investors in UK commercial property, some will be disappointed if they are expecting the kind of stellar performance experienced in the last three years.’