With 2018 now behind us, I thought it would be a good idea to reflect on what has been quite an exciting year in the world of commercial property. As my practice is based in Southend and covers the South East of Essex my comments are relative to this area.
It’s fair to say that the industrial market had been in the doldrums since the financial crisis in 2008. The low level of rents that are achievable and the high cost of land and construction has meant that there simply has not been a good enough return available to make industrial development economically viable.
However, in the last few years, demand has increased and existing stock has been in short supply meaning that rents have started to increase for the first time in a long while.
A good example is an estate of units circa 1,500 sq.ft. that we manage in Southend where rents topped out roughly £6.50 around the time of the economic crisis. Landlords had been more interested in keeping tenants in situ, rather than increasing rents, therefore the rent remained level for many years. In 2017 the landlord decided that we should start a renewal program and we set the rents at £8.50 which was in line with rents being achieved elsewhere.
The tenants were undoubtedly expecting an increase and all reluctantly agreed with the new level.
Another factor that has assisted in this is the realignment of business rates and the availability of rates relief which means that units with a rateable value of £12000 or less, pay no business rates, which has meant that tenants within this band have more money available to pay rent.
The freehold market has also been the subject of considerable growth. This has arisen from both owner occupiers, who wish to purchase an industrial unit for their own use. This is generally done a pension fund meaning that they can pay rent to the pension fund and enjoy all of the tax benefits that this makes available.
Investors have also been looking at Industrial and have been prepared to accept much lower returns than they have in the past which has meant that yields have dropped and prices have risen.
The office market has also been transformed in the last few years as many of the larger redundant office blocks have been redeveloped into residential apartments, under permitted development rights. This has taken a huge amount of floor space out of the market place.
The majority of local offices tend to be under 5,000 sq.ft. and buildings that can be easily broken into smaller suites have remained popular.
Stand-alone freehold offices remain popular as smaller firms look to purchasing a freehold through their pension funds and reletting to their companies to enjoy the tax benefits.
We will all be aware of the crisis that is hitting the High Street and the amount of empty retail space in most town centres is now a depressing reality, as shoppers turn to the internet and more regional shopping centres in favour of the local High street.
However, there is some good news at the smaller end of the market and there are pockets where local parades are doing reasonably well, as they offer more locally based specialist traders rather than the chain stores that we have all got used to in the traditional town centre.
Areas such as Leigh Broadway, Rayleigh, Wickford High streets continue to hold up reasonably well in both rental levels and freehold investment yields.
The solution to the High Street crisis is extremely complex but it would appear that the days of large high street stores is coming to end as shoppers move away to the convenience of the internet and the experience based lure of larger regional shopping centres. It will be interesting to see if rents continue to drop and smaller shops are made available to small businesses at levels of rent and rates that local businesses can afford, this may be a way of breathing new life into these areas. However it would appear that there is still some pain to come for High Streets.
Thoughts on 2019
Whilst BREXIT may not have a direct effect on many locally based businesses, the constant media coverage and the general negativity surrounding the whole issue will undoubtedly have an effect on business confidence generally and make businesses think twice before investing in acquiring additional premises.
Developers starting to build new office and industrial accommodation will also be nervous that they will not be able to let or sell their completed developments.
Hopefully come the end of March there will be some sort of deal in place and business can make plans and move forward, but until this happens I think its fair to say that there is a general pause in activity until the direction is clear.