A qualified chartered surveyor with 20 years' experience in the industry, Executive Director, Nick Terry at Ocorian looks at the reasons why investors choose to invest in commercial real estate.
Commercial property is a very relationship-driven investment, and you need to ensure the people looking after those relationships really know what they are doing.
At Ocorian we work with investment portfolios ranging from around £20-30 million for single assets, through to portfolios of about £5 billion, all in commercial real estate, and have seen it all when it comes to the ups and downs.
Here are a few of the reasons why we have seen people choose commercial real estate as their investment - with the caveat that there is always risk.
Rent reviews act as a hedge against inflation
With the Bank of England warning that UK inflation could hit double digits by the end of the year, there could be concern over the impact of inflation eroding real-term rental income for commercial real estate owners, especially given many tenants are long-term. This can also be said about new projects, where rising building and labour costs drive up overall production costs and eat away at potential returns.
Rent reviews help protect property owners from the increase in expenses due to inflation. They are typical every five years and adjust the rent, reflecting market forces and/or inflation, and are normally drafted to be 'upwards only' in their nature. This helps to ensure that, even if the market runs away from you, you're not blindly losing income. Whether the reviews are market based or index based, they act as a hedge against inflation so your real-term income is not being eroded.
Long income streams and generally stable returns
Investing in commercial real estate is rarely a quick-win solution; those who decide to invest are usually in it for a number of years and are typically looking for a long-term income stream. This is why stabilised real estate is of particular interest to institutional investors who have known liabilities they need to match on a periodic basis over a long time frame - if you buy real estate now, and provided you have tenants who don't run into difficulties, you know you have a reliable income stream for five, 10, even 20 years.
It is possible to significantly affect value
Not only do you have the rental income stream coming in, but you can also influence the capital value of an asset at any time. For example, if you invest £15 million in real estate, you could make further investments on refurbishment and significantly enhance the asset's value; the same investment invested into FTSE shares could go up or down but largely at the whim of the market, and with minimal control from the investor. Similarly, your real estate investment will bring in regular income through rent; with shares, you may get a dividend, or not, depending on the performance of a company you can't influence. Additionally, the investment is a lot more tangible with real estate - not least because you can visit it in the real world to check in.
But it is not without risk...
The flipside, of course, is you do not get any rewards without taking a level of risk. Real estate is not a market you dabble in; you do need to really understand what you are doing. An investor needs to be well-advised and have a team around them that includes a good law firm and a good team of surveyors - that team may comprise investment surveyors to help find the asset; asset management surveyors to help manage the investment and the relationships with tenants; property management surveyors to look after the building; quantity surveyors to deal with specific elements of work, such as cost controls and project management. And, of course, everyone in that team must be paid from the investment returns.
And if you are using a corporate structure to hold an asset, it's equally important to have a good firm of administrators who are highly experienced in real estate - this can help the whole investment cycle run more smoothly. Many asset classes have been challenged during the Covid era, and real estate is no different, but working with an experienced team has undoubtedly helped Ocorian's real estate clients navigate challenging situations and improved overall performance.
Specialists in real estate investment structuring
Ocorian's Real Estate Team partners with many of the world's largest financial institutions, dynamic start-up fund managers, and boutique houses to deliver bespoke, technology-led real estate investment structuring services.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.