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There’s still plenty of potential for investors in commercial property

Jitters over the outlook for the commercial property sector are overdone, says Max King. Investors should consider this Europe-focused real-estate investment trust.

Amid the sweeping prophecies that life will never be the same post-pandemic, it is refreshing to hear a more cautious view. “I am a slight sceptic of the widespread assumption of ‘a new normal’,” says Mat Oakley, head of pan-European commercial property research at Savills. “We see such forecasts in every crisis; change will happen more slowly.”

“Commercial property is a simple asset class,” he says. “In an expansion, we need more space. Currently, we are in a thumping great recession, but I expect a not-quite V-shaped recovery in which GDP recovers quickly but unemployment doesn’t return to 2019 levels for five years.”

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Property investment, now past the nadir, was 43% below the five-year average in the first half of 2020. But it was 51% down in 2008 and “the recovery will be better this time”. In the office market, vacancy rates are rising, there is downward pressure on rents and development starts are being delayed, but “we are not at the end of the cycle: the medium-term fundamentals remain good”. Less development will reduce vacancy rates and the pressure on rents.

What about the shift to working from home? Oakley points out that home-working is suitable for some tasks (reading documents, focused work and video or phone calls), but “a lot of things work better in an office so offices won’t disappear”. Offices are better suited to team management, meetings and the informal chats or chance encounters that can spark fruitful new ideas and strategies for the company, a key factor in services and creative businesses. Surveys show a marked swing in favour of working from home, but from one day a week or less to two or three days a week – not to full-time.

Retail parks have been more defensive than shopping centres, with weekly footfall down 20% rather than 60%. Retail parks are well suited to “click and collect” services and returns, while they also offer social distancing. In the industrial market, the take-up of logistics space in the first half was the highest for 15 years, but this type of property “is not as safe as it seems”. When vacancy rates rise above 12%, as they did in 2009, rents fall.

The best real-estate bets on the continent

Marcus Phayre-Mudge, manager of TR Property Investment Trust (LSE: TRY), is not ready to buy into the UK yet. Only 28% of his portfolio is invested in listed British shares; another 7% in directly held properties and 64% in continental shares. Of the latter, 45% is in Germany and Austria and nearly all the rest in France, Benelux and Scandinavia. He is cautious about Britain because since December 2015 European property shares have returned 45% in sterling, but British ones -20%.

Within the UK, favoured areas are “beds, meds and sheds”: student accommodation, healthcare property and self-storage, companies that are UK-listed but have their assets in Europe and two specialist real estate investment trusts (Reits), Supermarket Income and Secure Income. Student accommodation and Secure Income, owning hotels and leisure attractions, have been poor performers. Progress on the directly held properties may open the way to asset disposals.

Though the share price is down 32% since February, its European focus means that performance is far ahead of the UK property sector over three and five years. The shares yield over 4%, trade on an attractive 13% discount to net asset value and, with a market value over £1bn, are highly liquid. Phayre-Mudge is positive: demand from tenants, “excluding non-food retail, should prove stable while a lack of supply, due to the absence of a development cycle in 2008-2014 and the current development cycle being deferred, means that there is no surplus of new space to undermine rents… Real estate, particularly where income is long and strong, will be an attractive investment”.

By Max King

Source: Money Week

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Commercial property market shows signs of life

UK commercial investment activity rose 42 percent in June compared to May, up from £755m to £1.3bn, taking total volumes for H1 2020 to £15.6bn, according to the latest market update from Savills. With the all-sector prime commercial property yield remaining stable at 5.21 percent in June, Savills says that together this may signal some stability is now returning to the UK investment market.

According to the real estate advisor, another notable change is that there are signs that yields may harden on prime West End offices, industrial multi-let and distribution assets. This reflects a very typical turning point for the commercial property market, says Savills, with investor interest returning first to those sectors that are perceived as core.

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James Gulliford, joint head of UK investment at Savills, comments: “There’s some evidence that we may have passed the nadir of this cycle in terms of investment volumes in May. This of course does not change the overall story of Q2 2020 being the weakest quarter on record for UK investment activity, and we estimate that volumes in the first half of 2020 were 43 percent below the five year average, but the hope is now that a corner has been turned.”

Mat Oakley, head of UK and European commercial research at Savills, adds: “The shape of the UK economic recovery is increasingly looking ‘tick-shaped’, starting with strong quarter-on-quarter growth in Q3 2020, though with 2021 not showing a recovery of the magnitude of the fall seen in 2020. While a revival in GDP growth is imminent, unemployment is not expected to return to 2019 levels at any point in the next five years. Although this isn’t essential, as many businesses were reporting recruitment difficulties due to such a tight labour market, high levels of unemployment will drag on consumer sentiment, boost precautionary saving and diminish retail spending.”

By Neil Franklin

Source: Workplace Insight

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UK Finance: Finance sector committed to supporting commercial landlords

UK Finance has confirmed that the banking and finance industry will continue to support commercial landlord customers with the June/July rent quarter rapidly approaching.

The trade body said that lenders recognise that commercial landlords and their tenants may have concerns about their ability to make their payments and that support was available including the providing of capital payment holidays and amending current facilities.

Stephen Jones, chief executive of UK Finance, said: “Commercial finance providers are working hard to support business customers through these difficult times and lenders recognise that the current situation poses particular challenges for commercial landlords and their tenants.

“A wide range of flexible support is available, including amendments to facilities and capital payment holidays to help landlords and their tenants manage through the disruption.

“As part of the support being provided ahead of the June quarter day all the main commercial lenders are proactively contacting their major commercial landlord borrowers to identify concerns they have and provide support where appropriate.”

Those commercial landlords who are concerned about making loan repayments or require financial assistance during this time and who have not yet been in contact with their lenders should do so through the usual channels.

By Ryan Fowler

Source: Mortgage Introducer

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Commercial property rents predicted to slow with lease terms expanding

Latest research by various property consultants and experts indicate that rent levels are set to slow this year and lease terms on new deals will move out.

In the UK, the introduction of measures to restrict movement to try to slow the spread of coronavirus will cause significant disruption to activity in the short term and 2020 UK GDP forecasts have been slashed to -1.4% from +1% only a month ago. There is huge uncertainty around the duration and impact of current measures and a further worsening of the outbreak and financial stress could see GDP fall by 2.5% this year.

Research by Colliers International points to investors developers and landlords expecting that there will be little rental growth whilst lease term incentives will be moving out.

Gerald Eve notes: ‘Like all commercial property sectors, there is an expectation that industrial and logistics tenant defaults will increase through 2020 as cashflows are impacted, but this will also depend heavily on government intervention and the nature of industrial occupier activities.

“While all occupiers will experience short term impact, the scale and duration will vary greatly across industries.

“Many tenants are struggling with cost pressures and are already requesting monthly payment plans or rent payment holidays, and these are being looked at on a case-by-case basis to assess genuine need. Industrial and logistics occupiers have not benefitted from the recently announced relaxation of business rates liabilities and other tax credits, with the 12-month business rates suspension currently only for retail and leisure sectors.”

Property consultants and experts are lobbying for business rates cut across the board not just for retail and leisure.

However, once things return to ‘normal’ it is expected that rent levels and lease terms will bounce back.

Source: Logistics Manager

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Scottish commercial property market ‘shows resilience and growth’ in 2019

Scottish Property Federation (SPF) analysis of 2019 commercial property sales figures has revealed that the total value of sales grew in Scotland for the third consecutive year.

At £3.37 billion, the value of commercial property sales in 2019 hit its highest annual total since 2015. The total value of sales increased by £136m (4%) compared to the total for 2018.

The SPF’s analysis also shows that the number of commercial property transactions was the highest in the decade, standing at 4,667.

The number of commercial property transactions has increased every year since 2012, with 139 (3%) more sales taking place in 2019 than in the previous year.

Cities

Edinburgh continued to dominate the Scottish commercial property market. The capital recorded £1.01bn in commercial property sales during 2019, some £379m (60%) more than in 2018, and accounted for 30% of the Scottish commercial property market by value.

Glasgow also saw an increase in the total value of its commercial property sales. Scotland’s largest city saw total sales of £753m, some £229m (44%) higher than in 2018, and captured a 22% share of the Scottish commercial property market.

High Value Sales

Of the 4,667 commercial property transactions in Scotland during 2019, only 97 (2%) sold for over £5m. However, with a combined value of £1.75bn, these transactions accounted for more than half of the Scottish market by value. In total, 15 of Scotland’s 32 local authorities saw sales at this section of the market in 2019.

David Melhuish, director of the Scottish Property Federation, said: “We’re pleased to see the Scottish commercial property sales market continue to grow in what has been an uncertain time for the economy and businesses. We expect to see this resilience turn into stronger confidence in the commercial property markets during the course of 2020.

“Our analysis shows the strength of both Edinburgh and Glasgow, which between them accounted for more than half of the Scottish market in 2019 in value terms.

“Edinburgh has seen a particularly strong year with several high value transactions occurring in 2019, including the sale of Standard Life Aberdeen’s headquarters and M&G Real Estate’s acquisition of Exchange Plaza.

“Glasgow saw a number of high-value retail transactions by overseas investors, including assets at the Great Western Retail Park and the Sauchiehall Building in the city centre.”

Source: Scottish Construction Now

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End of Brexit uncertainty boosts London commercial property market

London is set for an increase in commercial property investment in 2020 as international investors target the capital’s high-yielding office market, following the decisive 2019 UK General Election result. According to the latest research from Knight Frank, investors have increased the total capital targeting London commercial assets to £48.4bn, a 21 percent rise on 2019 and £2bn higher than 2018. However, with just £2.3bn of buildings for sale, investors will face strong competition, which is expected to drive values higher in 2020.

Knight Frank’s annual London Report details the opportunities and challenges facing the capital’s real estate market in the year ahead. It reveals that in 2019 London commercial property investment activity fell 15 percent to £13.9bn, down from £16.8bn in 2018, as Brexit uncertainty and a shortage of available assets constrained the number of deals.

Nick Braybrook, Head of London Capital Markets said: “Despite the fall in activity, London remained the second largest market for commercial office real estate investment in 2019, topped only by Paris and ahead of New York, Hong Kong and Berlin. London’s stability and global status is attracting international investors who see a competitive economy, strong occupier market and high office yields, compared with other global cities. We expect the sheer weight of international demand for London assets to push prices on, and we have already seen an increase in transactions as activity ramps up following the UK General Election result.

“International investors are attracted to London as a safe haven, offering political stability and positive growth prospects, as well as an attractive exchange rate and high yields. Office yields are amongst the best in the world and certainly the most favourable when compared to key European centres. In the City of London average yields are currently 4 percent, while in London’s West End they stand at 3.5 percent. Comparable yields in leading European cities such as Paris, Frankfurt and Amsterdam are 3 percent. And despite the prospect of London yield compression this year, office yields still outweigh most global bond offerings.”

Faisal Durrani, Head of London Commercial Research said: “One of London’s underlying strengths is its vibrant labour market, which is reflected in resilient leasing activity. New office development has not been able to keep pace with this demand, and almost half of the space currently under construction is already spoken for. This supply crunch is most significant for those businesses seeking large amounts of space. We are tracking 30 businesses seeking more than 100,000 square feet, yet there are currently just 16 buildings in London that can service these requirements.

“Indeed, the supply shortage is helping to underpin our rental growth projections over the next five years. These show that headline office rents will rise by 15.7 percent in core West End locations such as Mayfair and St. James’s by the end of 2024. Elsewhere, we forecast rents in the City core to grow by 20 percent in the next five years.”

By Neil Franklin

Source: Workplace Insight

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British commercial property back on the investment map

Investors expect to plough billions of pounds into UK commercial real estate this year, citing some long-awaited Brexit clarity after last week’s departure from the European Union.

Real estate investment foundered after Britain’s vote to leave the EU 3-1/2 years ago, hit by uncertainty over the move and its potential impact on the economy. But sentiment has improved with December’s resounding election victory for the Conservative party, effectively guaranteeing Brexit.

Though a trade deal between Britain and the EU has yet to be negotiated, LaSalle Investment Management told Reuters it plans to spend 1 billion pounds (on UK property this year. The company already has 12.3 billion pounds in real estate assets in Britain.

Madison International Realty, meanwhile, is “pursuing several possible transactions”, accoring to the private equity firm’s president, Ronald Dickerman. The firm said in October that it had more than $1 billion to spend on central London.

Dutch real estate developer Breevast, London-listed Intermediate Capital (ICG) and U.S. duo CA Ventures and Invesco Real Estate all told Reuters they see opportunities in Britain, with ICG’s co-head of real estate, Martin Wheeler, highlighting increased appetite from overseas investors.

Apollo Global , which lent $2.9 billion for real estate in Britain last year, is similarly upbeat. Ben Eppley, head of European commercial real estate debt at Apollo, said there has been an “an unlocking of transactions” in recent weeks thanks to greater clarity over Brexit.

Ghada Sousou, CEO of real estate recruitment agency Sousou Partners, said the business had been introducing UK real estate companies to overseas investors.

It is also helping a private equity firm to build up a UK real estate team, she said without naming the firm.

Uncertainties have by no means disappeared, however, with the trade deal negotiations and broader global economic factors having the potential to weigh on UK property.

“We are starting to hear from some European capital that maybe it’s time to think about London,” said Zach Vaughan, head of European real estate at investor Brookfield, adding that it may be too early to talk about a rise in transactions.

“If you are sitting on an investment committee in another country, you will ask what happens if there is no trade deal? More uncertainty is never helpful.”

By Carolyn Cohn and Simon Jessop

Source: Yahoo Finance UK

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Scottish commercial property investment exceeds £2 billion in ‘uncertain’ 2019

Investment in Scottish commercial property remained resilient despite a dip in volumes amid political and macro-economic challenges, according to new analysis from Knight Frank.

The independent real estate consultancy found that £2.074 billion worth of deals concluded in 2019. This was 10.38% below the five-year average after a quiet final quarter, when the UK went to the polls for the General Election.

Edinburgh offices was the stand-out asset class in 2019, increasing by 70.42% on the year before – from £284 million to £484m. By June 2019, investment levels in Edinburgh offices had outperformed the whole of last year on the back of a series of major transactions, including the Leonardo Innovation Hub at Crewe Toll and 4-8 St Andrew Square.

Overseas investors continued to be the main drivers of investment in Scotland last year, with a 56% share of spend on commercial property. Meanwhile, UK institutions’ share of investment has dropped to just 14%.

The well-publicised challenges faced by the high street were reflected in property investment levels in 2019. Transactions for shop units were 79.57% below the five-year average at just £44m (compared to £215.4m), while shopping centres represented £38m of investment in 2019 against an average of £197.6m (-80.77%).

However, Knight Frank said that following the General Election there had been a raft of interest in the Scottish commercial property market and, with a number of buildings being lined up for a sale, the year ahead looked very positive.

Alasdair Steele, head of Scotland commercial at Knight Frank, said: “There were a lot of factors for investors to contend with in 2019 – Brexit negotiations, a change of Prime Minister, and a General Election to name but a few.

“That inevitably leads to a pause for thought, as we have seen with any significant macro-economic or political changes in the past. Against that backdrop, investment levels were robust last year and there were some significant bright spots, such as Edinburgh offices.

“The proportion of buyers from overseas is at historic highs, with more than half of investment coming from international sources and the majority of deals being concluded off-market. Korean funds were particularly active last year – concluding three major deals in Edinburgh and Glasgow – while Middle Eastern interest has also been strong.

“We are already seeing signs that 2020 could be a great year. Investors are coming back to the market now that there is some much-needed political stability. We have had interest come in from a range of international sources, including some buyers who would be new to the Scottish market.

“Inevitably there will be some bumps in the road ahead as Brexit begins to take shape; but, for now, there is a real window of opportunity emerging and we expect trading volumes to pick up in the first half of 2020, all things being equal.”

Source: Scottish Construction Now

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Investing in commercial property: a tale of three markets

Britain’s commercial property sector has traditionally been divided into three subsectors: industrial, offices and retail. In the 1980s and 1990s, retail outperformed while industrial properties struggled as consumer spending rose inexorably but the country deindustrialised. In the last ten years retail has lagged as household spending migrated online; industrial property, however, has outperformed thanks to the growth in logistics warehouses, notably to service online shoppers. But in recent years some of the best growth has come from three smaller subsectors: student housing, healthcare and self-storage – or beds, meds and sheds. Investors can gain access to each of these subsectors through real-estate investment trusts. Are they still worth a look?

The university boom

Student numbers reached 2.3 million in 2018; 75% are undergraduates and 80% are British. Despite the introduction of full tuition fees in 2012, more than half of school leavers go on to higher education. The annual number of applicants through the Universities and Colleges Admissions Service (UCAS) has doubled to 533,0000 in 25 years. Students used to live in college-owned halls of residence or in the private rental market. But demand outstripped both the willingness of the former to provide the necessary capital and the capacity of the latter.

Unite Group (LSE: UTG) was founded in 1991, initially to provide purpose-built student accommodation in the Bristol area. It now provides 75,000 beds across the country. Unite forms partnerships with universities to ensure high occupation: 92% of beds are reserved for 2019/2020 and 60% are guaranteed by universities. Occupancy of 98%-99% has consistently been achieved and rental growth is in the range of 3%-4% per annum. At mid-year the group’s assets stood at £3.2bn, of which £1bn was financed by borrowings, although the £1.4bn recent acquisition of Liberty Living will have increased gearing to around 35%.

The shares, at 1,240p, trade at a 47% premium to net asset value (NAV), are valued at over 30 times earnings and yield just 2.6% but Unite says that the acquisition is “materially accretive to earnings”, while it is “confident of 3%-3.5% medium-term rental growth”. But even if the 12% growth in interim earnings and 8% growth in the dividend continues, it will take several years for the shares to look good value, despite the low-risk business model.

A turnaround story

Empiric Student Property (LSE: ESP) with 8,882 beds and £1bn of assets, seems much better value at 98p. It is on a 10% discount to NAV and yields 5%, but it is recovering from operational problems in 2017 that prompted a dividend cut. It focuses on smaller, higher-quality and more expensive buildings to appeal to graduates (46% of tenants) and overseas students (67%). GCP Student Living (LSE: DIGS), with £960m of assets, is of a similar size, but has less debt and an unblemished record. It trades on a 14% premium to NAV and yields 3.2%. It has 4,116 beds in 11 locations, but just 23% of its tenants are from the UK. As with Empiric, this may be an advantage as growth in international student numbers looks assured.

The rise of the health centre

The merger of Primary Health Properties (LSE: PHP) with MedicX leaves just two companies specialising in health centres: PHP, with £2.3bn of assets and Assura (LSE: AGR), with £2bn. Both trade on large premiums to NAV (38% and 50% respectively). But the attraction is dividend yields of 3.7% and 3.5% that are not only very safe, but also all but guaranteed to be at least inflation-indexed.

Both groups own purpose-built health centres, at least 90% of whose income comes directly or indirectly from the NHS on long-term leases, with the rest coming from pharmacies. Following the acquisition of MedicX, PHP now owns 488 of these, which are 99.5% occupied, while Assura has 560.

These health centres have replaced many of the old, small GP surgeries, but house many more doctors together with modern equipment, clinics, diagnostic testing, pharmacies and even day-surgery centres. Rental agreements provide for modest annual increases, but there is the potential for more if a property is modified or extended. Expansion comes from buying recently built premises or through funding a developer and then buying on completion, thereby avoiding risks connected with construction.

With only 20% of the PHP portfolio having a lease expiry of less than ten years, there is little opportunity or wish to trade the assets; the value of the shares lies in the rental stream. This makes them comparable to infrastructure funds, except that ownership of the assets is permanent. Strong performance in 2019 means that the shares of both are no longer great value, but they represent sound investments for those seeking secure, growing income.

The “meds” theme also covers two smaller companies that own residential care homes, Impact Healthcare (LSE: IHR) and Target Healthcare (LSE: THRL). Target, with £600m of property assets and £100m of net debt, operates 69 purpose-built care homes. Impact, with £311m of property assets and some £10m of net cash, owns 84 care homes and two healthcare facilities leased to the NHS. In both cases, the care homes are leased to high-quality operators for the long term, with built-in rental increases. Both shares seem attractive, with Target trading on a 7% premium to NAV and yielding 5.8%, while Impact trades on a 2% premium and yields 5.7%.

Note, however, that the number of care beds in the UK has fallen some 20% since its peak of around 550,000 in 1997. The NHS and local authorities have not been prepared to increase payments to operators by enough to cover escalating costs. In 2011 Southern Cross got into trouble amid an 8% drop in occupancy, the result of fewer referrals due to public-spending cuts. It could not pay its escalating rent bill and became insolvent. Well-run care homes are the most cost-effective way of caring for the elderly, but governments have repeatedly pursued the false economy of squeezing the private operators, who account for nearly all capacity. If this keeps happening, Target and Impact could find their rental income under pressure from struggling operators.

Businesses need more storage space

The self-storage market conjures up images of warehouses crammed with personal possessions. That, however, probably only accounts for a small part of the UK’s 20 million square feet of lettable area, with rates varying from £16 per square foot (sq ft)in Scotland to £28 in London. Personal storage is an important part of the market, but the business market is key. For small businesses, storing goods, records and stock at a self-storage unit or lock-up garage is likely to prove much cheaper than doing so at an office or in a shop, particularly with the increasing number of online entrepreneurs operating from home.

Hence the success of the two listed specialists, Safestore (LSE: SAFE) and Big Yellow (LSE: BYG), trading at premiums of 52% and 75% to NAV and yielding 2.2% and 2.8% respectively. Safestore, with 149 stores (including 22 in the Paris region) has 6.5 million sq ft of lettable area valued at £1.4bn and Big Yellow, with 75 stores, has 4.6 million sq ft valued at £1.5bn.

Big Yellow’s recent interim results revealed revenue and profit growth of 3.4% and 6% respectively, thanks to a small increase in like-for-like occupancy and a 1.9% increase in rent per sq ft. Lettable area increased only 0.7%, although there are 13 development sites, of which six have planning permission. Big Yellow also owns 20% of Armadillo, with 25 stores, which it presumably hopes to buy the rest of. That would give it 6.6 million sq ft in all.

Safestore’s recent final results showed a 5.6% increase in revenue and a rise in earnings per share of 6.3%, thanks to increases of 3.5% in average occupancy and a 1% in average rates. It plans four new stores in 2019/2020, but insists that its “top priority remains the growth opportunity of the 1.5 million sq ft of currently unlet space”. Big Yellow’s occupancy of 83.4% is higher, despite its larger stores, giving less unlet potential and its net rent per sq ft of £27.73 is 6% higher than Safestore’s, despite the latter’s focus on London and the southeast (70 stores). Both shares trade on 27 to 28 times underlying earnings, so they look expensive despite the solid record and prospects.

ASR strategist Zahra Ward-Murphy acknowledges that “the beds, meds and sheds theme is not new and these sectors have been outperforming for some time. Nonetheless, we like these sectors because they are underpinned by secular demand drivers and therefore should prove relatively resilient to any further slowdown in growth”. Business risks look low and dividend yields are reasonable in relation to low interest rates and bond yields, while dividends should climb steadily.

However, with the exception of the recovery story of Empiric and the historically risky care-home owners, valuations are high and vulnerable to market setbacks, so investors should wait for the next general sell-off before eyeing them up.

By Max King

Source: Money Week

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Commercial estate agents keen for approval rates of planning permissions

The majority of commercial estate agents (74%) would like to access data where they can easily see the approval and refusal rate of commercial property planning permissions, research by SavoyStewart has found.

Some 69% think there needs to be improved data when trying to identify the average price per square foot that commercial properties have sold for in any given area.

Darren Best, managing director of SavoyStewart, said: “Data has revolutionised the property industry. Providing key analytics and metrics on various variables that are enabling property professionals to make more informed decisions.

“As the quantity and quality of data grows, there are various aspects with regards to data that commercial property professionals wish there was more of or could be more fine-tuned to provide greater insights.

“This research certainly highlights the type of data that property professionals hope is more easily available in 2020. With some very surprising outcomes.”

Similarly, 63% desire data that will allow them to determine the average asking price per square feet that commercial properties in any set location are commanding.

Interestingly, over half (51%) would like to gain more data that highlights the commercial property crime statistics for different postcodes.

Some 40% feel the same about data that will enable them to more accurately assess the average internet speeds by postcodes.

Alternatively, just under a third (32%) feel more data is required on 5-year capital growth projections for commercial property in any given postcode.

By Michael Lloyd

Source: Mortgage Introducer