With a potentially volatile UK economy 2025, it will pay to broaden the range of assets commercial property investors include in a portfolio.
Commentators predict between two to four Bank Base Rate cuts this year, but all continue to note the fluid nature of global politics, the raft of unknowns associated with the Government’s plans for growth and the uncertainties that flow from the cost-of living struggle for some.
Repossessions have risen significantly since the forbearance tactics enforced during the pandemic but are still historically low.
The 6,440 mortgage possessions taken through 2024 are still 20% lower than the average seen in the five years before 2020 and 87% below the previous peak seen in 2009.
So opportunities will arise as the economy shifts and changes, and diversification into a range of different asset classes and property types has always made strategic sense for any property investor. By mixing and honing those underlying assets, investors will create a strong barrier against the inherent risk of investment.
Shifting strategy
The commercial property market is undergoing a transformation as investors rethink their tactics to accommodate those changing economic conditions. If investors have the right lending partnerships in place, they ought to expect relationship-driven support at every stage of their property and portfolio development.
Rather than focusing solely on capital appreciation, many are diversifying across asset types, seeking income-generating opportunities, and rationalising their portfolios.
Some investors are moving away from long-term, speculative, capital appreciation-based investment and prioritising assets that generate a stable income. Examples include Legal & General’s Build-to-Rent (BTR) strategy across cities like Birmingham, Manchester and London, which offer long-term rental income and secure cash flow as rental demand rises.
Equally, as e-commerce tightens its grip globally, investing in large-scale logistics warehousing as opposed to struggling high-street retail outlets also continues to offer another type of secure rental income. Student lets have become another strong prospect in cities with dense university populations as demand remains high regardless of economic cycles.
For those investing in these asset types, the capital appreciation is a given, but these investments also offer the prospect of a stable income.
Investor trends also include the trend of rationalisation – selling properties which have already been refurbished or which no longer offer a value-add element. Next, the cash is released to reinvest in more strategic assets.
Another trend gathering pace is the development of unbroken freehold blocks, and those with airspace or development potential above the building.
The sustainability of these types of developments and cost-efficiency have appeal because there’s no need to buy the land reducing the development cost. The UK government has also relaxed permitted development rights making it easier to get approval on these projects.
So, coupled with high housing demand, many investors are investigating these opportunities and either adding extra floors, extending rooftops or selling or leasing the development rights for these buildings.
Diversifying asset types
Plenty of commercial investors continue to look beyond the potential of residential portfolios. Mixed-use developments with office space, a residential element and commercial property are gaining popularity for their resilience in some of the fluctuating market conditions we are currently seeing.
According to LendLord data drawn from 1,126 HMO properties, the hotspot with the highest average yield of 15.4% for house of multiple occupation (HMOs) is for investments in the North East. However, the North/South property price divide still means the highest annual rental return emerged out of the South East at £46,041.
This is why many investors choose to diversify portfolio investments across the UK, adding a more consistent mix to large portfolios.
Supporting investors
Lenders with the expertise and capacity to provide the finance for a wide range of commercial and mixed-use properties will be the best partners as investors look to expand further.
Providers like ourselves can offer tailored solutions through seasoned business development managers who are happy to advise or handhold investors through the complexities of the market.
We can offer up to 70% LTV for commercial mortgages and offer flexible repayment structures, including providing equity releases for those keen to retain a ‘hunting’ fund ready to strike when an opportunity arises.
These facilities can be a cost-effective way to secure funds and in effect have the advantages of being a “cash buyer” to finance properties bought at auction within a tight time frame, for example.
But whatever this year and this uncertain economic and political climate brings, partnering with the right lender ready to respond quickly to their needs when the opportunity presents will be key to success for any investor.
Conor McDermott is director of SME lending at LHV Bank
