At today’s
Fundamentals briefing, Rob Martin, Head of Research & Strategy at Legal & General Property (“LGP”), set out LGP’s commercial property market outlook, identifying where he believes the best opportunities for investors currently lie.
Rob Martin said: “The UK commercial property market spans a range of property types, lease lengths, covenant strengths, rent review terms and more. While the pace of market returns is hard to predict as the economy remains weak and banks continue to review their exposure, there are still some rare investment opportunities for investors with the right knowledge and resources.” According to Rob, the strongest returns will come from correctly identifying and then capitalising on some key trends in the market – such as a growing divergence between high and low quality assets, restructuring in debt markets, challenging conditions for retail markets and the appeal of alternative rent review structures.
“A recovering economy, albeit gradually, with low levels of new commercial property space being built, points to demand and rental growth focusing on the best quality assets. A number of factors are currently favouring occupier markets in London and the South East. That balance is likely to lead to greater price differentiation with lower returns for lower quality assets.”
Rob went on to explain that ‘modern, well-located retail assets’ are likely to maintain high occupancy levels. “But we anticipate that poorer quality retail stock will experience weak demand and falling rents over the next few years which is likely to require a pricing correction to restore value.”
Rob also argued that the necessary restructuring in the stock and flow of debt is creating the opportunity for investors to purchase assets or enter into joint ventures with banks and the potential to participate in the market as providers of equity or debt.
Finally, Rob also drew attention to ‘alternative rent review structures’, such as index-linked or fixed uplift leases. “In the modest economic conditions that we forecast, these types of structures have a particular attraction. They also act as hedges against extreme outcomes; whilst we are not projecting either stagflation or deflation, these rent review structures would be sources of significant outperformance under those scenarios.”
