Is Commercial Property Still a Good Investment in 2022?

We are living in uncertain times, which can be off-putting for investors. From COVID-19 to the cost of living crisis to the war in Ukraine, there are serious ongoing economic challenges. However, the picture isn’t all doom and gloom – there are signs that the commercial property market is moving in a positive direction with significant opportunities for those ready to invest.

The market started the year on a positive note, with Savills reporting rising commercial property investment and prime yields beginning to trend downwards. This suggests increased demand for commercial property, driving prices up and therefore reducing the ratio of property value to rental income (which prime yields measure).

While this suggests a good level of confidence from investors, it is important to fully understand and consider the current risks to the commercial property market before making an investment. You should also be careful about exactly where you choose to put your money, as some types of property are likely to be a safer bet than others.

What risks are there for the commercial property market in 2022?

Although businesses no longer have to operate around Covid restrictions, infections are still common.  Many workplaces continue to be impacted by staff needing to take time off sick or work from home to avoid infecting other staff both of which can affect productivity and growth.

While the government has now announced energy bill discounts for this autumn, the cost of living crisis is likely to further impact many businesses and the wider economy. UK retail sales have fallen recently, suggesting people are spending less. This may affect the viability of businesses such as shops and restaurants that are dependent on consumer spending.

The war in Ukraine is also likely to have a negative impact on the UK economy, with the president of the World Bank, David Malpass, stating it will cut global economic growth.

All of these factors could affect demand for commercial property if businesses fail or don’t expand in the way they might otherwise have done. It could also mean commercial tenants will have difficulty paying their rent, impacting landlords’ returns.

Another factor to consider is that, with the Bank of England having raised interest rates, the cost of borrowing will increase. The Bank has been unable to rule out further interest rate rises or say how high interest rates could go, leading to additional uncertainty about the future cost of commercial property finance. This runs the risk that commercial property owners’ costs will increase just as their incomes could be reduced.

Does this mean it’s a bad time to invest in commercial property?

The reality is that commercial property is usually a good investment. Return expectations for 2022 are between 4-11%, according to Savills UK Cross Sector Outlook 2022. This suggests it is far from being time to despair over the likely value of a commercial property investment.

While there are some significant risks at the moment, this does not mean you should definitely go and look for somewhere else to put your money. However, it is really important to know the risks before making an investment.

You need to be very clear about your expected costs and returns, then carefully consider how these could be impacted by any changes to the economy, consumer behaviour etc.

This is something you should always think about before making any type of investment, so the fact there are particular risks at the moment doesn’t change this. It just means you may need to be a bit more conservative about the level of income you would need to achieve from your investment to see a good return. You can then factor this in when considering how much you are willing to pay for a particular property investment.

It is also important to think about over what time frame you want to realise a return on your investment. The current economic uncertainty won’t go on forever – it only took 2 years for the London property market to recover after the 2008 financial crash – and there is nothing yet to suggest a crash on that scale is likely now.

If you are looking for a return over the longer term and can afford some potential short term fluctuations in the value of your property investment and your income from it, then the risk should be much lower.

The final thing to consider is that it may be possible to negotiate more attractive terms for buying commercial property at the moment. So, you could end up with a good long-term investment for a lower price than normal at the moment.

What commercial property should you invest in right now?

There are lots of factors to consider when investing in commercial property, including location and the type of property. Current and expected future demand can provide a good steer for when to invest, as well as any sector specific risks.

Retail warehouse space remains in high demand, driven by trends including a higher level of online shopping. Uncertainty over global supply chains may mean businesses want to have higher inventory levels in the UK, potentially increasing demand further.

Market data shows that office space also remains in demand, especially in locations such as Oxford and Cambridge, as does industrial sector property nationwide.

Shopping centres and high street retailers are seeing relatively low demand, although 2021 saw a significant increase in investments in shopping centres, so it is possible this trend will start to change.

Here to Help

Investing in commercial property can be a fantastic opportunity even in the current economic climate. However, it is important the deal is structured correctly to maximise your potential returns and to account for any risks. Getting expert legal advice and support is, therefore, an absolute must.

Longmores’ commercial and investment property solicitors are highly experienced. We regularly handle all manner of commercial property investments, including high value properties and developments.

Our experts can guide you through every stage of an investment, including negotiating the terms of the deal, creating contracts and agreements, securing finance, resolving any potential problems and selling on commercial property when the time comes.

To discuss how we can help with a commercial property investment, please get in touch, and we will be happy to advise.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.