Investing in commercial property – when is the right time?

There are always opportunities in the commercial property market because it is a sector that adapts to the economy, says commercial investor Kirsty Darkins.

Kirsty Darkins

Kirsty is qualified to have an opinion. She is an active investor in the retail sector and her commercial property career has spanned 20 years, first as a surveyor and more recently in building her own portfolio. She and her business partner now have 15 commercial tenants.

2020 was a turbulent year for the economy and business thanks to Covid-19. Economic uncertainty tends to have a knock-on effect for the commercial property sector, so what does that mean for people who invest or want to invest in it over the next couple of years?

In Kirsty’s view, the Covid-19 pandemic has largely accelerated trends that were already beginning to emerge, so what might have taken years – maybe even decades – to materialise has happened instead in a matter of months.

Shopping habits have changed while people have been confined to their homes during lockdowns, but the retail sector is far from dead. For example, while the Amazon factor has had a huge impact on the retail sector, online stores can never replace the need for a local pharmacy, hairdresser or beauty salon. Homeware and DIY stores have fared well as people turned their attention to home instead of travel or other material items.

The right location

As we move forward and out of the pandemic, convenience and service-led businesses will probably continue to flourish and lead to strong demand for commercial premises in the right location.

While the reality is that many stores have closed, and Kirsty confirms that many properties will be repurposed as retail space shrinks, the locations that may remain in demand are the ones that have previously been considered as secondary. Smaller market towns and parades of shops in residential areas will always be home to the businesses that thrive on footfall or rely on personal interaction.

Looking beyond the retail sector, the prolonged period of working from home since the beginning of the pandemic will not wipe out demand for office space. It has been popular with many, employees and their employers alike, and it may eventually lead us to a hybrid model combining commutes to the office with work-from-home days, hot-desking and collaboration days.

However, many have suffered from the lack of interaction with their colleagues. Zoom can only go so far and it would appear that the office plays a big, maybe even critical, part in culture within a business.

There are plenty of harbingers of doom for commercial property but many commercial sectors are thriving and growing, even over the past year. For evidence of this we turn to industry, in particular logistics. Demand for warehouse space is increasing, as are rents.

Again, location is critical. For logistics, good transport links and easy vehicle access are going to be important factors for the business owners.

Kirsty stresses the point that commercial investors need to understand and follow the markets. What are the key trends? Which industries are trading well? Which ones are not?

The answers to these questions will lead to an understanding of what types of property are needed to serve those businesses.

The right property

Commercial property is valued differently to residential property. There is far less emphasis on the bricks and mortar – it is all about the security of the income stream. This in turn comes down to the tenant and the lease. The better the tenant and the longer the lease, the better the value of the property.

Kirsty favours independent business tenants rather than large corporates. In her view, they are more willing to work with the landlord and indeed it is no secret that many of the big brands and chains have played hardball with the landlords of their premises during the pandemic.

As with residential property, it is possible to add value to commercial, but this doesn’t necessarily mean getting down and dirty to do refurbishment work. It’s possible to make a big difference through what she refers to as a paper exercise.  For example, she has bought several properties with short leases, which meant that she was able to increase the value by renewing the lease, sometimes with the existing tenant.

Mixed use properties can also offer potential for value uplift. Most of these will have retail space on the ground floor, with either office or residential space above.

Kirsty shares a mixed-use retail/office/community case study in the October 2020 edition of YPN, in a feature focussing on commercial property investing. She goes into the numbers and explains how she increased the value through a paper exercise. (You can subscribe here to read this and explore several other commercial case studies in the magazine or on the YPN app.)

It’s likely that a lot of opportunities will open up in the commercial sector over the next year or two as consumer and business habits shift and the economy gradually recovers. Keep your ear to the ground, watch the trends in your area and understand the planning regulations around repurposing commercial buildings for alternative uses.

If you want to see Kirsty chatting with YPN’s Ant Lyons, have a look at this interview … 

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