What’s new for the commercial market in 2018?
2018 will see a fair amount of change in the commercial property market. Lewis Chambers highlights the issues that are likely to have the biggest impact.
Will the MEES cause a mess?
The main provisions of the Minimum Energy Efficiency Standards (MEES) take effect from the 1st April 2018. From this date, all landlords of commercial and residential property with a MEES rating of ‘F’ and ‘G’ will be obliged to undertake energy efficiency improvements before they may grant a lease.
Unfortunately, the grading system and survey system are inflexible. There are numerous low specification commercial properties currently occupied effectively for simple uses that will fail the test and require capital expenditure. In my opinion, the scheme lacks flexibility and the dogmatic interpretation of the rules is already generating unforeseen difficulties for many owners and occupiers. With the above in mind, we recommend you review your properties in good time before 1st April 2018.
What will more flexible lease terms mean for landlords?
If you own retail investment property with a lease expiry in 2018, be mindful that many independent and multiple retailers are targeting more and more flexible lease terms. For the last 10 years, it has been common practice for tenants to seek renewal based on a 10 year term containing a five year tenant only break clause. Unabated pressure on the retail sector from the online and out of town offerings has led to further flexibility being required. So, landlords should brace themselves for renewals reflecting five year fixed terms with three year tenant only breaks for all but prime property. Rental levels are also under pressure, and landlords should expect challenging negotiations in this sector. In light of this, we recommend you make sure that you address your renewal issues promptly.
Will owner occupation continue to rise?
Well run SMEs continue to demonstrate huge appetite for owner occupation. With the current low interest rate regime set to continue, we expect continued strong demand for freehold property for owner occupation in lot sizes up to £1 million. Demand is at its highest for industrial/warehousing opportunities and offices up to 5,000 sq ft in size.
Acquisition into SIPPS or SASS arrangements remains popular and tax efficient. High quality new developments such as at Godbolts Business Park, Marks Tey, Bawley House and Lanswood Park are attracting high levels of interest.
Lanswood Park, Broomfield Road in Colchester is located five minutes from the town centre and offers high quality offices to let or for sale. Contact the Fenn Wright Colchester commercial team on 01206 216 565 for more information.
Are you wise to yield compression?
With the stock market at or close to all-time high levels, as well as neutral or negative returns on bank balances, commercial property remains the target of many investors. With opportunities scarce, strong demand even for mediocre investments is driving yields down. Routinely small lots of under £500,000 offering limited covenant strength and short term leases are achieving yields of 7%, creating an initial yield gap of 2 – 4% depending upon gearing and borrowing criteria. This margin can quickly dissipate where voids or defaults occur, and it is more vital than ever to buy wisely. To avoid disappointment, we recommend you only make a purchase if you are attracted to the property and not just its yield.
If you would like to discuss one of the above issues, or any aspect of your commercial property, please contact your local commercial agent.