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Insight & Opinion

Healthier economy helping to boost the commercial property sector

Author: Staff

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Demand for commercial property has risen in the past year, thanks to the improved fundamentals in the economy, according to a new report that claims a stronger and more healthy British economy has helped to improve the number of people who want to invest in commercial property or rent space.

The latest report released by Cluttons showed that in the space of the last year, low inflation has assisted the commercial property market by boosting confidence among businesses, giving the market a far stronger occupier base as a whole and subsequently improving returns for investors in commercial units across the board.

In its Commercial Property Market Outlook report, Cluttons said that we now see a situation in which demand for commercial units outstrips supply, which can only serve to improve the level of income that investors make as rental prices grow in line with competition among tenants.

In the past year, it said that this reality surrounding economic growth had allowed the office market to enjoy the most concentrated benefits. For the past 12 months, returns in this area of the market have topped 23 per cent, with capital growth of 16.8 per cent in this period.

However, the industrial market has started to catch up in the last few months as well, thanks to a renewed level of demand from occupiers. According to Cluttons, the return for these now sits at 22.7 per cent, bolstered by yield compression and a capital growth level of 15.1 per cent.

“As we forecast last year, sheds are now matching offices for performance. One reason is that prime logistics take-up has improved over the past year, driven by manufacturers, especially in the automotive sector, and retailers with supply constraints in key locations,” said John Barrett, head of valuations at Cluttons.

Looking forward, the company also stated that we are likely to see a change in the drivers of return growth in the commercial market, with investors far more likely to be reliant on the growing income level rather than yield compression in the next couple of years across the commercial sector.

“With prime yields now stabilising across most markets, income growth is replacing yield compression as the primary driver of future performance. Average income return is at six per cent, so it’s still a good time to invest in property,” Mr Barrett said.

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