The commercial property market is rapidly changing and facing highly uncertain times in the face of Brexit. We have a look at how the industry is evolving and what commercial property stocks to watch. If you live on the United States you should check more about the positive commercial real estate market data austin tx


Source: Bloomberg

The UK commercial property sector has undergone sweeping changes in the past three years. Brexit has provided a shock to the system by knocking valuations, causing a severe slowdown in rental growth and casting a dark cloud over future demand for British property, but longer-term market trends are also reshaping the industry. partner with a nationally based property management company, specialized for investors – placing tenants, collecting rent, and handling all maintenance and upkeep.

The EU referendum result and the subsequent fall in the pound has lifted demand for British exports and industrial property while demand for office space has remained resilient – although it is unclear whether this will still be the case when the UK formally leaves the EU, especially if no trade deal is in place. Meanwhile, structural changes have also taken their toll as high streets and shopping centres continue to empty out amid the rise of online shopping.


We have a look at the transformation occurring in the industry and go through the top UK commercial property stocks that are affected.

How has UK commercial property performed since the Brexit vote?

The performance since the referendum in June 2016 has been mixed but, looking at the overall picture, it is clear the vote to Leave has had a detrimental impact on UK commercial property. Construction has started to decline, the growth in rent has significantly slowed and while valuations have largely held up, there are still fears of a Brexit-fuelled crash around the corner. Our construction is something very import for our business, that’s why we always hire this construction material supplier in hartford county ct


UK commercial property rental growth slows

Figures from the Office of National Statistics have shown the amount of new UK commercial construction work undertaken by the private sector has been declining month-on-month since December 2017, while rental growth has plunged to just 1.5% in September from well over 4% in the months running up to the referendum, according to GVA, the UK’s largest independent property agency. Rental growth over the 12 months to September slowed to 1.4% from 1.6% in August, and the mid-range of the Investment Property Forum (IPF) Quarterly Consensus forecasts annual growth in 2018 will be just 0.9% (low of 0.1% to a high of 1.8%). In 2019 that is expected to slow even further to just 0.4% (low of -1% to a high of 1.6%).

The slowdown in rent has hit all types of commercial property but there are both pockets of resilience and weakness in the market.

The growth in rents for industrial property has remained the most robust since Brexit, running at about 5% at the time of the referendum and, although on a downward trend for the last three to four months, still running at about 4% per year.

Rents for office space plunged after the vote from 7% per year to near 1% but has slowly ticked up since the middle of 2017 to run at over 1.5% today.

Last is retail property, which has become the worst performing segment of the market. Owners were already struggling to lift rents before the referendum, growing at an annual rate of about 1%, but the increasingly tough retail environment and the loss of multiple major retailers has been pushing average rents down since the middle of 2018.

UK commercial property returns are deteriorating

The sector has largely managed to generate positive returns after quickly recovering from a short-term, albeit severe knock after the referendum vote in June 2016. Each segment has experienced a different fortune. Returns from industrial properties like factories have comfortably outperformed the wider market and returns from offices has remained in line. However, retail properties have slipped into negative territory this year:

Total return chart

Total return chart

Still, returns from industrial properties in October were less than half their 2018-high in June and significantly lower than the post-Brexit peak seen late last year and returns from offices have also been lower this year compared to 2017.


Income return (from rent etc.) has remained largely stable since the referendum (it will take time for the knock-on effect on rental growth to feed through) and the fluctuation in returns has been driven by valuations. The price of retail properties was barely edging higher in 2017 but has fallen every single month throughout 2018 bar February, while valuations for industrial space and offices have grown at a slower rate this year compared to last:

Capital value chart

Capital value chart

Current trends in the UK commercial property market

There are both long-term trends still evolving as well as new, emerging ones that have only just started to surface. These include:

  1. Repurposing retail space: Aware that high streets and shopping centres will never be the same again, more companies are starting to convert this idle space for new uses, particularly for housing
  2. Retail shops to retail warehousing: High street stores continue to shut because more people are shopping online. This has led to stores being shut but more warehouses being opened as online sellers expand their logistics and delivery networks
  3. Devaluation of the pound is a boost for industrial sectors: The fall in the pound has increased demand for British exports and led to higher demand for industrial space.
  4. Shared offices and shorter leases: A gradual shift to more flexible, shorter-term office leases has prompted several companies to introduce new concepts to rival newer competition that has found success, such as US firm WeWork
  5. Alternative commercial property attracting attention: The fundamentals for alternative commercial property such as student housing and self-storage remain strong and offer the most growth potential
  6. Brexit and higher interest rates pose biggest threat: Although the structural changes impacting the retail sector will continue, the two most immediate threats to the UK commercial property sector are the uncertainty spawning from Brexit and the likelihood of higher interest rates being introduced over the coming years

British Land vs Landsec

Landsec and British Land have been the two dominant options for investors looking to gain exposure to commercial property in the UK, but both have suffered this year because of their over-exposure to retail and the lack of industrial property within their portfolios.

Landsec has had to writedown the value of its retail assets this year, such as the Bluewater shopping centre in Kent, and British Land paid the price for having as much as half of its portfolio made up from retail properties by swinging to a £42 million pre-tax loss in the first half of 2018.

This has prompted both companies to unveil new strategies to shift away from the struggling retail space, double-down on their respective office developments and, most notably, move into house building by converting old retail outlets into homes.


British Land vs Landsec: H1 2018

British Land Landsec
(£, millions) H117 H118 H117 H118
Retail net rental income 131 120 159 153
Office net rental income 62 67 144 155
Retail profit 127 117 148 143
Office profit 61 67 135 147
Pre-tax profit 238 (42) 34 42
Portfolio value (billions) 13.7 12.9 14.1 14.0
LTV ratio 26.7% 28.4% 25.8% 26.2%
NAV per share 939p 967p 1,404p 1,385p
Dividend 15.5p 15.04p 19.7p 22.6p

British Land and Landsec focus on multi-use properties

Both British Land and Landsec are focused on developing multi-use properties: those that can host a variety of businesses/residents and accommodate different tenants. This involves building a mixture of developments that compliment and create demand for one another, placing restaurants near offices, offices near homes, homes near shops, and so on. It also makes new developments more versatile by facilitating different types of tenants, allowing them to market vacant retail space to industrial firms, for example, depending on how demand shifts in the market.

British Land’s development pipeline for new offices is based around its ‘campuses’ model. Overall, its focused on high-quality multi-use assets primarily in London and the South East. Its retail property portfolio continues to be slimmed down with around £2.5 billion worth of retail assets sold since April 2014, including department stores, shopping centres, retail parks and superstores.

The headline news at Landsec centres around its plans to make £3 billion worth of new developments after Brexit, subject to a ‘good deal’ being struck between the UK and the EU. If all goes according to plan, then the firm intends to start all the work within 12 to 18 months after March 2019, building £2 billion-worth of new office space and £1 billion-worth of mixed-use developments. However, it has warned of the possibilities it could make a U-turn if ‘a chain of events that are outside of everyone’s control’ emerges.

Converting UK retail property into homes

Although both companies are looking to reduce their exposure to retail property, they are also looking to use their large portfolios to their advantage by converting idle space into new homes. Consultancy firm CACI has estimated that half of all retail centres in England and Wales have too much retail space. UK high streets will never be what they were and are emptying out as part of the long-term shift to ecommerce and both business and government are starting to act.

UK Chancellor of the Exchequer, Philip Hammond, has already announced plans to speed up the process that allows empty shops to be converted into homes and launched a £675 million fund to ‘boost retail and bring properties back into use as homes, offices and cultural venues’.


This has encouraged UK commercial property stocks to enter an arena they have previously avoided. British Land expects up to 10% of its business to be made up of residential property within just five years by focusing on Build-to-rent, and Landsec’s £1 billion mixed-use development is based around converting old retail space at its suburban retail sites into 4000 new London homes (starting down Finchley Road and in Shepherd’s Bush). Other companies have also signalled they will make a similar move, with the likes of shopping centre owner Intu stating it has 470 acres of ‘potentially developable’ land like car parks in its portfolio, with plans to redevelop this space for 5000 new homes already under consideration.

Why is UK retail property struggling?

Mothercare, House of Fraser, Maplin, Poundworld and Toys R Us are just the start of a growing list of traditional retailers that have fallen into administration. Those operating in high streets, retail parks and shopping centres have been unable to compete with online competition because they have been weighed down with rising expenses, everything from business rates to labour and running costs. The Centre for Retail Research estimates over 2100 stores have closed in 2018, affecting up to 40,000 employees. This effect is snowballing as more big-name brands shut their stores, such as Debenhams’ decision to close up to 50 stores over the next three to five years, which in turn will lead to lower overall footfall for the remaining retailers. High-street footfall dropped 2.2% in September and shopping centres continued to prove the most vulnerable (down 2.4%). Shopping centres owned by the likes of Intu and Hammerson have been the worst performing types of UK commercial properties in terms of returns since the EU referendum:

Shopping centres chart

Shopping centres chart

Average rent for retail property declined 0.9% in the 12 months to September, according to GVA. As more surplus stock enters the market, those retailers still battling the tough environment have renegotiated their terms with landlords, claiming it is better for them to stay in business and pay less rent than shut up shop and leave the landlord with an empty property. However, the threat of empty buildings will wane as the opportunity to convert them into in-demand property emerges. If turning the high street into homes offers particularly good returns, it could even accelerate the closure of struggling retail outlets as landlords look to convert them sooner rather than later.

Investment in retail property in the three months to the end of September totalled just £1.2 billion, the third lowest amount on record since the financial crisis, according to BNP Paribas, and down from £2 billion a year earlier. Again, shopping centres stand out, with quarterly investment hitting the lowest level on record. Compulsory Land Acquisition Sydney also backs up that finding, reporting mergers and acquisitions of shopping centres totalled £558 million in the first half of 2018, the lowest figure since records started over 20 years ago.

Investment in retail warehousing has continued to rise as growing numbers of ecommerce players, including giants such as Amazon (which is reported to be snapping up space in preparation for a possible launch of its US grocery chain, Amazon Go, in the UK), continue to grow their logistics and distribution networks to serve customers. BNP reports investment in warehousing rose 13% in the third quarter (Q3) to over £660 million, however total returns from this segment have started to come under pressure during 2018.


Intu vs Hammerson: what a difference a year makes

It was only last year that Hammerson put forward a £3.4 billion takeover for its rival before pulling out of the deal in April because of the rapid deterioration in the market, much to the annoyance of Intu shareholders who felt they had managed to lock in a good price that they are now unlikely to get. Intu shares were valued at 234.9p under that offer but trade at just 190.8p today. Intu has since been approached by a consortium of investors led by the company’s deputy chairman John Whittaker alongside Peel Group, Saudi Arabia’s Olayan Group and Canada’s Brookfield Property Group, which values the company at just £2.8 billion. The deadline to finalise the offer has recently been extended for the third time and expires at the end of November.


In addition, Hammerson had to fend off attempts of a takeover by French firm Klepierre that valued the firm at £6.35 per share, claiming it undervalued the business. Today, Hammerson shares trade at just 420p and it has attracted investment from Elliot Advisors, the notorious activist investor that aims to change how poor-performing companies are run.


Hammerson, in attempt to win over its new investor, has unveiled plans to sell off over £1 billion worth of properties by the end of next year and buyback up to £300 million worth of shares. While Intu is looking to revamp its retail space, Hammerson seems more akin to selling off its poor-performing space and returning the cash to shareholders amid the lack of investment opportunity in the retail space. Hammerson has delayed the huge expansion of the Brent Cross shopping centre in London because of the rapid amount of retail closures. Still, it holds confidence in the long-term future of its portfolio with plans to invest in its flagship centres. Landsec is doing the same as part of its mixed-use development plan by highlighting the ‘excellent potential for a new town centre at Lewisham where it already owns the Lewisham Shopping Centre.

UK office property holds steady but biggest changes yet to come

Demand for both city and regional offices has held steady over the last two years but this will be tested as the Brexit deadline draws nearer and new models around flexible leasing grow in popularity. GVA reported the amount of new office take-up in London during Q3 was up 6% year-on-year to 3.9 million square feet and expects new office completions in the capital to peak in 2019 at over seven million square feet. The amount of new regional office space is also set to hit a new high this year after eight million square feet of new space was introduced in the first three months of 2018, on course to surpass the record 10 million square feet added last year.

Although businesses are still moving into new offices, there are reports that many smaller businesses have delayed making any major decisions until the post-Brexit picture becomes clearer. On the other hand, sectors that are expected to be the most affected by the UK’s departure from the EU such as financial services and the creative industries still account for most of new office space: 34% of new office space taken up in Q3 was by technology, media, telecommunications and creative firms while 18% was snapped up by financial services. This could be a signal of confidence in the face of Brexit, but many still fear demand for office space could falter should the UK and EU not strike a future trade agreement that meets their needs.


Although valuations and rent for UK office space have continued to edge higher since the referendum, the rate of growth has significantly slowed and hit stocks like Workspace and IWG. Workspace, London’s leading provider of office and studio space, saw the value of its portfolio rise 2.6% in the six months to the end of September but said this still caused an 18% drop in profits, claiming the valuation rise was considerably lower than the previous financial year to the end of March 2017, when its portfolio value surged to £2.3 billion from £1.8 billion and doubled annual pre-tax profits.

IWG, despite its international exposure with over 3000 offices in 100 countries, has also struggled because of its home market in London where it is currently refurbishing numerous major locations. When it issued a profit warning in October, it said Brexit and a fall in US earnings was to blame.

UK office property stocks respond to WeWork

US startup WeWork has ruffled the feathers of many in the office property game. The company ‘transforms buildings into beautiful, collaborative workspaces’ and has thrived by offering large shared-services centres that help accommodate small businesses and freelancers seeking more flexible leasing terms.

Numerous London-based companies are introducing alternative models to take on this approach by companies like WeWork. British Land plans to make its terms more flexible to accommodate the needs of smaller businesses, spearheaded by its flexible office brand ‘Storey’. Landsec is launching a new flexible office product early next year with an initial 36,000 square feet of space down Victoria Street in London and expanding its ‘Landsec Lounge’ concept into more of its office blocks, essentially a shared café space that encourages networking between employees of different tenants in the building. IWG already has its own flexible office brand named Spaces but has lost ground since WeWork became the biggest occupier of offices in central London (after the UK government) earlier this year.

UK industrial property continues to outperform the market

GVA forecasts industrial rents to grow by 3.7% in 2018 before slowing to 3% in 2019 and the segment should continue to outperform the wider market. The amount of distribution warehouses being taken up in the first nine months of 2018 was up 13% from the year before and this was spread across the country with the Midlands accounting for over 35% of total take-up compared to the South East at 19% and the North West at 17%, according to BNP.

Total investment in industrial property in Q3 was 19% higher than the ten-year Q3 average and BNP has said the best performers are industrial and logistic assets in London and the South East, particularly those with more than one tenant.

Segro’s market cap surpasses that of British Land and rivals Landsec

The position of the two dominant commercial property stocks in London has been disrupted by Segro, which owns warehouses across the UK and Europe. Earlier this year the company’s market cap surpassed that of British Land and today is valued at £6.15 billion, only a fraction behind Landsec’s leading valuation of £6.4 billion.

The rise in demand for storage and distribution centres has helped lift Segro’s performance and the company’s decision to sell out of retail space after a review in 2011 has proven a to be a good one. While both British Land and Landsec currently trade at significant discounts to their net asset value (both trading at about a 38% discount), Segro currently trades at a slight premium.

Alternative UK commercial property stocks to consider

Alternative commercial property, albeit a smaller segment, is outperforming the market and grabbing attention. This includes everything from student accommodation, retirement housing, healthcare facilities, leased hotels, data centres and self-storage providers. For investors, there is plenty of opportunity to gain exposure to some of these sectors.

According to JLL, the gap between supply and demand in UK student accommodation has closed significantly since around 2011, but demand still comfortably outstrips supply: there are around 1.8 million full time students in the UK compared to around 1.65 million beds. The amount of beds on offer directly from universities has virtually stood still for well over a decade, contributing less than 800,000 beds.

The gap has been closed primarily through direct letting. Direct lets to students has risen from just tens of thousands of beds back in 2005 to between 900,000 to 1 million this year. Unite Group, the FTSE 250-listed student accommodation provider, saw pre-tax profits jump to £142.5 million in the first half of its financial year compared to £83.9 million a year earlier. The dividend was hiked 30% to 9.5p and the firm said it plans to add 6500 new beds over the next three years, with almost 3100 new beds being added for the recently-started 2018/2019 academic year.

The other sector with major representation on the London Stock Exchange (LSE) is self-storage through companies such as Big Yellow Group, Safestore and Lok’n Store.

Read more: Investing in small cap stocks and the AIM market

Big Yellow’s results for the six months to the end of September showed a 7% lift in revenue, a 9% rise in adjusted pre-tax profit and a 9% increase to its dividend to 16.7p, although reported profit fell 22% because of a smaller valuation gain. Its current development pipeline is expected to add around £17.4 million in annual net operating income at a development cost of £198 million. In September it raised over £65 million through a placing priced at £9.30 per share, with the stock now trading closer to £9.10.

Safestore is the largest self-storage provider in the UK and its Q4 results to the end of October rounded off a solid year for the firm. Quarterly revenue rose 11.6% to outpace the annual increase of 10.4%. On a like-for-like basis, occupancy levels and prices both rose with the final quarter again outpacing the rest of the year, implying momentum has built as it enters the new year.

Lok’n Store is a smaller player in the market but growing. Its annual results for the year to the end of July showed a 6.6% lift in revenue to £17.8 million with a 34% rise in pre-tax profit to £5.3 million. Its dividend was raised 10% to 10p per share. Having added three new branches, it plans to do the same again in the current financial year. Its current development pipeline will take it to 42 stores.

Commercial property outlook: Brexit and interest rates

Commercial property has been tested over the past two to three years but is yet to go through the biggest challenge on the horizon. While the retail sector will continue to undergo structural changes, both office and industrial space are under threat from the potential impacts of Brexit: if barriers to moving staff start to arise then the demand for office space could decrease as companies shift operations abroad and any problems moving goods could mean the boom in British manufacturing and exports could be short lived.

Since 2013 overseas purchasers have accounted for anywhere between 40% to 50% of annual property investment in the UK, according to GVA. This peaked at the top end of that range in Q3 of 2017 as foreign investors continued to take advantage of the falling pound. Since then, overall investment levels have risen but domestic buyers have made up more of the pie, with foreign buyers accounting for just over 40% of all annual investment as of the Q3 2018. The flow of this substantial investment, having already fallen, could also change depending on how Brexit pans out.

The other big but certain consideration on the horizon is rising interest rates. While this will help those with tenants on inflation-linked leases to grow rents, it also means lending and mortgages becomes more expensive for both developers and tenants.