Commercial Property REITs: The Future in Investment

Commercial property REITs in the UK are set to become more popular and prevalent in the UK looking forward, as the promised returns offer much more of a steady income...

Commercial property REITs in the UK are set to become more popular and prevalent in the UK looking forward, as the promised returns offer much more of a steady income than could be seen from the more traditional investments in residential properties.

Although the UK's residential property market has enjoyed a fairly strong period over the last two years in particular, fears still exist that there is a real danger of a property bubble striking down the market as it did in 2008. Property still has a place in the portfolios of investors, though, and with the economy getting stronger and business levels improving, commercial real estate will only go from strength to strength looking forward, according to experts. 

Commercial REITs (real estate investment trusts) are large investment groups that come together to purchase properties that are far too expensive for single investors - such as hotels, serviced offices, warehouses, shopping centres and others - will see themselves able to capitalise on a strong 2013 with an even better year in 2014 predictions show, giving this investment avenue an edge in the UK market. 

Commercial returns increased in 2013

Last year was a strong one for the commercial property sector, with returning strength in the economy - culminating in an expansion of some 1.9 per cent - bringing about a rise in business levels and a real strength in the commercial market for investors.

According to the latest figures published for 2013 by IPD in its monthly outlook, the commercial market in the UK welcomed returns amounting to some 10.9 per cent in 2013, an increase from the earlier predicted 8.6 per cent. 

It said that a surge in investments throughout 2013 meant that property REITs witnessed their stock's value rising by 3.8 per cent to hit its strongest situation seen at any point since March 2010. As well as an increase in valuations though, returns were sitting at a high level of 6.8 per cent, helped along by 0.6 per cent rises in rental returns.

It means that investor sentiment among REITs towards the end of the year were at their highest for a number of years. This was boosted by wider ranging economic conditions which saw an increased level of investment outside of central London. Scotland, and other areas of England such as Manchester, Leeds and Birmingham proved strong throughout 2013 as business levels in these regions facilitated a growth in office rentals in particular.

What does the future hold?

While 2013 was a strong year for the commercial property sector, REITs are also expected to see further strength in 2014, thanks to the fact the economy is set to expand yet again, and business confidence is rising.

Latest predictions have stated that economic expansion this year should amount to 2.9 per cent, far exceeding that seen throughout 2013. This is set to improve the levels of business activity taking place throughout the nation, with the latest report from accountancy industry body the ICAEW stating that confidence among UK business owners (particularly in finance and banking) is at a record high early in 2014.

This will no doubt bring about a rise in commercial activity, as more companies look to move to larger and more suitable offices to help with the growth of their operations. Investment growth is at its fastest level since 2008, and there will now be far more companies able to grow and upgrade what they are doing. 

And this will mean better returns for REITs throughout this year, according to experts reporting in the Guardian. It is thought that commercial investments will experience double digit returns throughout the whole of this year. George Shaw, manager of the £1.1bn Ignis UK Property fund, told the news provider that he expects to see returns hit 11.5 per cent this year on the back of competition for a limited number of quality assets, while others are also predicting totals in excess of ten per cent. 

Anne Breen of Standard Life Investments said that returns could even hit levels as high as 12 per cent as strong demand boosts the market throughout this year.

"There is hardly any construction overhang from the crisis, which has created limited choice," she said. "This is why I think we will see a strong bounce back in tenant activity. With office spaces drying up in London and demand for space high, I am optimistic that rental growth will only go one way – up."

- Wednesday 05 March 2014

*This page is provided for information purposes only and should not be construed as offering advice. Flex Profit Hub is not licensed to give financial advice and all information provided by Flex Profit Hub regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.