Commercial property is set to weather global economic headwinds

Geopolitical tensions and the ongoing recovery from the global pandemic continue to create significant uncertainty for investors. Policymakers are attempting to tackle the corrosive impact of inflation rates, which are predicted to hit 10% in 20231, and interest rates would increase to 0.75%; with many analysts expecting rates to increase further.

In such challenging times, it is understandable that investors seek a flight to safety, abandoning volatile assets such as equities in favour of real assets. Real assets such as property have also proven to be a reliable hedge against inflation and commercial property tenancy agreements, for example, normally include inflation-linked rent increases, making them a valuable addition to a portfolio for today’s long-term investors.

Commercial real estate winners

The global pandemic created uncertainties for the future of commercial real estate. As companies were forced to move to home working, there were predictions that this model would become permanent. However, hybrid working appears to be the favoured approach as the world emerges from lockdown, and commercial property is still in demand. In the UK, the Q1 2022 RICS Commercial Property Market Survey shows a 30% increase in demand for office space compared to the end of 20212

Real estate sectors, such as logistics, have benefitted from structural changes within the retail market, picking up the lost revenue from the high street.

Sectors that are less cyclical, where demand is less influenced by the economy have also seen continued performance, including healthcare and social housing which all continued to operate throughout the pandemic, as the services and care provided at these properties are essential. Such sectors are indicating long-term trends, highlighting increased demand in the future and are also heavily undersupplied in terms of quality real estate available.

Property yields and rising interest rates have low correlation

Low interest rates, as a result of tight economic policy following the global financial crisis, helped prop up real estate. But it does not follow that as interest rates start to rise, the commercial property markets will be negatively affected.

Property yields and interest rates have a relatively low correlation, as seen after the financial crash of 2008 when interest rates fell, property yields did not follow the same path3.

Investing in a diversified portfolio of real estate assets helps liquidity

At certain points in the economic cycle, the ease with which you can buy or sell property will vary. Market shocks and other events can mean it costs more to withdraw from property investments, as we saw during the financial crisis and post-Brexit.

However, liquidity varies across the assets within real estate and the markets in which they are based. By investing in a diversified portfolio of real estate assets through a fund, it can be easier to access listed real estate securities as well as investing in direct property.

Ben Yearsley of Shore Financial Planning said “An innovative hybrid approach seems the obvious choice for direct property investors concerned with liquidity. The TIME:Property Long Income & Growth fund allows investors to access both real estate securities and direct property with exposure to sectors offering long-term growth.”

Commercial property supports ESG targets

The UK’s built environment is responsible for 25% of the country’s carbon emissions4,[i] which might suggest that the sector is not suitable for investors trying to manage climate change risk.

However, in the last two decades, emissions have reduced by 30% as the efficiency of current building stock improves and are replaced by greener alternatives, and policymakers are placing a huge expectation for buildings to be net-zero by 2050.

Properties boasting verifiable green credentials offer attractive investment opportunities in not just the commercial real estate sector, but also residential.

At the same time, investing in commercial properties with a social purpose – affordable housing, schools and hospitals for example – can also meet investors’ ESG targets while delivering long-term value.

Far from being mutually exclusive, commercial real estate investment offers a genuine opportunity for investors to make a long-term return alongside making a real difference to the environment and society.

Roger Skeldon is Co-Fund Manager TIME:Commercial Long Income, TIME:Social Long Income and TIME:Property Long Income & Growth.