Capital profit

It is fair to say it has been a white-knuckle ride for the commercial property sector over the last few years but early signs indicate that 2011 is a year where we will begin to return to a level of stability. The recent Budget was bound to raise eyebrows but George Osborne’s strap line: “Britain is open for business”, should not just be welcomed by the business community but also by commercial property professionals, who can seize the opportunities that this could bring.

A reduction in corporation tax will have wide implications for the property market. We know if a company is based in the UK, it pays corporation tax on its worldwide profits, which are adjusted for tax purposes. Any foreign income on which a company pays tax abroad is also liable to tax within the UK, so the lower the corporation tax, the more attractive a UK business base becomes.

Competitive landscape
Reforming rules governing multinationals’ foreign profits will undoubtedly lure back some of those businesses which have moved away. That said, it won’t be a case of businesses shutting down their offices and packing up their suitcases to flock back to Britain overnight; but a competitive tax landscape will certainly make the country more appealing.

The Confederation of British Industry (CBI) recently claimed the UK could be the top western economy for business if the government plays its part in answering frontline investment needs such as keeping business costs down and developing new markets. This has to be encouraging for commercial property investors looking to answer the needs of those looking for new premises to locate to.

We can’t ignore the slight decline in commercial rental values, but this should not concern investors keen to earn extra money in this area. Recovery has been taking place in London and other areas in the UK are expected to follow suit. Among investors, the demand for commercial property remains healthy. This is largely because of the high yields that are currently achievable which are well worth taking advantage of.

Mixed signals
Investors would certainly be forgiven for thinking the commercial property sector was giving investors mixed signals. Some will still wish to bide time – cautious of what impact the government cuts will have on occupier demand and what interest rates will do. On the other hand you might be tempted knowing the value of commercial property is edging higher. In fact, UK commercial property values have risen 17 percent over the past twenty months. The future of the sector depends largely on the fortunes of the economy but investors need to recognise the potential for income if they do their research and invest wisely.

One business eyeing up a return to the UK is advertising giant WPP which said it would come back to the UK once measures in the Budget were in place. Publisher and events organiser United Business Media also announced it was considering returning its tax base to the UK. Three years ago the business quit Britain for Dublin to take advantage of lower Irish tax rates. Smaller businesses are likely to consider following suit by retaining their UK base, but this will all be in good time.

The likelihood is businesses looking to expand will do so in the UK, rather than overseas and foreign businesses will look at opening outlets here. Whatever a businesses’ background it will need premises. At Bridging Finance Limited we provide fast funding solutions and are expecting to see a number of businesses coming to us to snap up commercial property quickly ahead of expected price rises. We work with professional services firms across the UK and many have already had clients tell them they wish to expand in the UK, rather than open outlets abroad, which is a sign of things to come. If legislation is implemented in accordance with the promises made, it makes perfect sense for many businesses that had ventured overseas, to make a welcome return to their home turf.

In the last few years we have already seen the tide beginning to turn for the manufacturing sector. An increasing number of businesses have looked at moving production back to Britain due to quality concerns and higher freight prices undermining the reasons they switched to producing goods overseas in the first place. The recession undoubtedly put a lot of pressure on businesses to re-evaluate their decisions on location and views on the UK’s business environment for manufacturing seem to be changing. UK factory space didn’t used to be a wise investment choice but it could be an area with a promising future.

Space interest
UK Office space has, however, been a growing area of interest. Global real estate firm Jones Lang LaSalle recently reported that demand for office space in London had increased by six percent during the first quarter of this year, a trend likely to continue.
The majority of commercial premises are let to businesses on long leases. It is typical of a firm to rent a property out on a 25 year lease. Generally, the capital value of commercial property depreciates over the long term which makes income the main driver. From letting to well established and reliable tenants – a steady long-term income can be generated, especially at a time when the economy is starting to see a return to normality.

Commercial property lets have been steadily increasing and now this trend is expected to continue as more businesses welcome the cut in corporation tax and base themselves in the UK over the next few years. Many are likely to set themselves up in the capital so purchases in London are likely to be a sound future investment.