Interest in commercial property investment has soared in recent years and is expected increase further according to the latest annual commercial property forecast published by the Royal Institution of Chartered Surveyors (RICS).
It claims indirect investment from individuals has risen 400% since the stock market falls of 2001, with commercial property returns continuing to attract individual private investors with total returns last year staying close to 20% for the second year in a row.
RICS says overseas investors were the dominant force in the market during 2005, taking over form domestic institutional investors, and accounting for £15bn or 30% of all purchases.
The survey claims buyers from the Middle East have been particularly active as rising oil prices have increased spending power, while UK institutional investment accounted for £11bn of all direct commercial purchases last year, although the net investment fell to just £2bn after a peak of £4bn in 2004.
Despite the return of equities as the most popular asset class last year, with returns outstripping those from commercial property for the first time since 1999, the survey says the advent of UK Real Estate Investment Trusts (Reits), is expected to further entice retail investors into commercial property funds through tax sheltered personal finance vehicles such as ISAs and Self Invested Personal Pensions (Sipps).
Meanwhile, figures suggest investment in the market has more than doubled in the last five years from £21bn in 2000 to £50bn in 2005, with the largest increases in activity happening in the last two years, coinciding with the biggest rises in commercial property values since the late 1980s.
The survey reveals commercial rents have fallen by almost 9% since 2000, while commercial property values continue to rise, with 12.8% in 2005 being the largest recorded increase since 1988.
As a result RICS expects rental growth to be strongest in the office sector reaching 4.4% by the end of 2007 and retail rental growth to halve to 2%, while industrial rents are expected to see marginal falls.
Although it also forecasts a decline in total commercial property returns during the rest of the year of 17%, followed by a 9% drop in 2007, as a result of a slowdown in purchaser activity.
Oliver Gilmartin, a RICS economist, says the doors to commercial property are opening up to a much wider audience and individuals are beginning to appreciate this kind of investment can generate income while exposing them to comparatively reduced risk.
He adds: “We are seeing a rush into tax sheltered savings plans from those wishing to diversify their portfolios and spread their investments across different asset classes and geographical areas.”
But he warns, while the next two years will continue to see healthy returns for investors in UK commercial property, some will be disappointed if they are expecting the same kind of stellar performance experienced in the last three years.
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