Is commercial property a good investment?
THE office investment market has been relatively stable throughout the last decade and the star performer recently has been industrial property, which has seen values rise considerably.
We can’t however ignore the fact that investments in retail assets have been hit hard. A typical example is Fairhill shopping centre in Ballymena, which traded in 2015 for £45.6 million and was sold for less than £6 million earlier this year.
Similarly in 2008 Tesco in Royal Avenue was sold for £15.9m and has traded recently at significantly less than its asking price of £4.25m. With so many retail properties coming to the market, at first glance it is hard to see the justification for buying these assets.
We are all aware of changing shopping patterns which have seen internet sales growing from 19.7 per cent in January 2020, to a current level of just under 28 per cent. In fact, during the peak of lockdown internet sales reached just over 36.6 per cent of all retail sales.
The rise of the internet paints a very gloomy picture for retail in general and for investors in the bricks and mortar – or does it?
The first thing to be conscious of is that just over 50 per cent of all online sales are generated from retailers who have a physical retail presence. In other words, they need physical stores to satisfy the needs of their customers and support their online presence.
Secondly, lots of retailers were able to remain open during the various lockdowns and the majority of those have been trading very well.
Take B&M Bargains, with around 20 units in Northern Ireland, who saw revenues increase in 2020 and have consistently been producing profits of around £250m.
And they are not the only retailer to have traded exceptionally - B&Q, Home Bargains and the majority of food retailers and discounters have all been performing well. Most of these retailers have been occupying space on their own dedicated sites or on retail parks.
The issue over the last decade is that the purpose and function of small retail units, both on the high street and in shopping centers, is changing - affecting retailers, particularly those selling mid-market fashion. It is difficult to isolate profits being generated by a particular unit as many are used for internet returns or for customers to try on clothing, etc, only to subsequently order online.
Given this background, you can see why there is still considerable interest in buying retail parks and large standalone units which have been trading well, but what is the justification for buying shopping centres?
In simple terms it is all about value - the value of these assets has fallen so far that they now look attractive in terms of returns and with innovative asset management and a fair wind they could become one of the star performers in years to come, given the low base price they are being sold for.
As for my initial question - is commercial property a good investment? Clearly this will depend on how sophisticated the purchaser is and if they can read trends in the market.
For those who get it right, then there is no doubt that commercial property is a good investment which provides solid returns both in terms of capital and rent.
Declan Flynn is managing director of Lisney (www.lisney.com)