A spin-off from Britain’s growing economy is a boost for commercial property investment.
With more businesses starting and entrepreneurs having more cash in their pockets, the demand for commercial space rises.
These entrepreneurs need workspace, storage and manufacturing areas to run their businesses. As the demand for space rises, so do rents as the number of prospective tenants outstrips the supply of property.
In turn, this leads to a rise in commercial property values.
Economists have long realised that a growing economy also hoists up commercial rents and the prices of property.
That’s why property analysts are predicting the sector will do well this year.
The British economy has a feel-good factor.
People have more money in their pockets to spend as the cost of living falls and soon this should feed through to the cost of goods as lower energy prices mean they are cheaper to make and transport.
More people are in work and according to the latest government figures, wages went up 2.5% in the past year.
This has led to the rate of increase of commercial property values outstripping growth in rents for the first time since the recession.
One institutional investor ploughing cash into commercial property is financial giant Aviva
“We expect commercial property values to keep rising for the rest of the year,” said Aviva analysts Richard Levis. “Annual returns are heading for the 18% mark when rental income and capital growth are combined for gross yield.
“Low interest rates are helping with prices and will push the value of property up even more.”
However, one analyst thinks the market will flip next year and commercial property returns will come from rents not capital growth.
Aberdeen Property Trust is looking for growth of up to 15% in 2015, explained a spokesman.
“Some places, especially London and the South East are expensive and this boost in property values is pushing down yields,” said a spokesman. “We are looking away from the capital and at properties with strong rental prospects because we believe rising prices will start cooling in a year or so.”
However, although commercial property funds are looking good, the fear of many experts is if market prospects shifts, investors could be left marooned with their cash locked in depreciating assets.
Even if the fund has large cash cushion, a steady exit of investors could lead to liquidity problems.