UK Property – Residential vs Commercial

By Martin Skinner

My last two blogs discussed what I believe to be understandable but over-stated concerns of a double-dip in the UK economy in 2010.

This week I’m going to dig into the reasons behind the recent outperformance of residential property as compared with commercial property and would love get some feedback from readers.

In broad terms commercial property values in the UK fell approximately 40-50% from the peak of the market in 2007 to their trough in early 2009 whereas residential property in the UK fell approximately 15-25% from peak to trough.  Both have rebounded somewhat as the fears of complete financial and economic collapse have faded.

Why has commercial property fallen so much more than residential and how are they likely to compare in the years ahead?

Private vs Institutional Investment
The residential property market is a lot more granular than the commercial proeprty market.  Most residential properties are owned by their occupants – far more so in the UK than in Europe for example.  Commercial properties tend to be owned by large (typically institutional) investors.  The two markets though linked in many ways therefore operate differently.

Purchases are typically larger and long lease terms are the norm (usually 5/10 years minimum).  Each tenant also tends to take more space and be responsible for the repairs, insurance and general upkeep of the building.  By comparison lease terms for residential properties are generally very short (6/12 month AST’s) and the landlord is typically responsible for the buildings insurance and maintenance.  It’s therefore a lot easier to invest a large sum of money in commercial property. 

The ease to which money raised could be deployed & managed innevitably played a significant role in the type of property it was invested in. 

Occupier Markets
When the economy took a big hit tenants had to cut their overheads and of course the space they occupy makes up a large proportion of the overheads for both businesses and households. 

It’s here the supply and demand dynamics diverge significantly for commercial and residential property.  Just before the credit crunch even as housebuilders were merging, leveraging and generally overstretching themselves there was a great deal of discussion around the undersupply of homes for people to live in.  The same was not the case for commercial property.

Future Trends
I believe developments in technology and working practices are going to have a profound impact on the way we live and work. 

Most notably employers can’t offer the ‘job for life’ anymore and flexible working has both been encouraged and demanded in response.  In economic terms this is a good thing – flexibility and de-centralisation of planning encourages personal responsibility and greater productivity.  This will lead to more people working from home and part-time from serviced offices.  Social media is also going to accelerate this trend and lower growth in demand for large floorplate formal office space is therefore likely.

The growing pensions crisis combined with the shock many households have experienced recently is also likely to have at least some effect on peoples saving patterns.  People are likely to save more and spend less.  Combined with the trend towards shopping online growth in demand for space shopping centres is likely to reduce.

By comparison we are likely to continue to attract high levels of immigration from abroad (particularly Eastern Europe) and therefore growth in demand for residential accommodation is likely to persist.

Summing Up
Institutions will continue to struggle to deploy large sums of capital into residential and will maintain their focus on commercial despite consistent historical outperformance by residential.

Both commercial & residential production capacity (supply) has been significantly impaired for at least 5 years. 

Residential property has the most compelling argument for future demand growth and in my opinion rents are therefore set to rise fastest for residential property – in the best areas (most notably in London) examples of significant rental increases are already becoming commonplace.

Do you agree?  Either way, what trends do you believe will significantly influence these markets in the coming years? 

Additionally here’s my round up of the best of the recent news:

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1 Comment

  1. Hi Martin, interesting story. Social media and online networking on smartphones may also create some jobs like the internet did in the late 90’s (at least I hope so, we need new jobs!).

    I thought you’d like to see an advance copy of the RICS report about how social media will impact property. It will feature in several RICS initiatives over the next couple of months. The paper is one which the RICS will make available to the public, not just members, and so feel free to pass it on as you wish. The published paper is at: http://bit.ly/4XA0r9. There is a page about CREOpoint so if at some point you’d like to write about our community.

    I hope we get a chance to catch up in due course, I will be in London around December 27th. Meanwhile call me on 914 310 4189 with any question.

    Best, JC Goldenstein CREOpoint Founder


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