Why not buy an office block?

    7 March 2015

    From taxi drivers to hairdressers, half the world seems to own residential buy-to-let property. But why does hardly anyone own an office building or a lock-up industrial unit? That was my first thought when I saw an office building for sale in a local village for £330,000, with tenants in situ paying a combined £30,000 a year in rent. Try finding a flat with a gross yield of over 9 per cent.

    The answer, I suspected, lay in television. Homes make good telly. We identify with couples who dart from one property to another, accompanied by TV crews, prodding worktops and making plans to demolish walls. We’ve all been there, and depending on our temperament we either want those couples to succeed or fall flat on their faces.

    But how do you make good telly out of empty office blocks and exhausts-while-you-wait garages in south London railway arches? Commercial property goes for a song, I reasoned, because it has passed by the goggle-eyed audience who have bid up residential prices.

    I didn’t get far into my office block before I realised there’s a bit more to this question. The yield looked high because the building needed a fortune spending on it: the boiler room was full of asbestos. But there was a bigger and more general problem: since 2008, commercial landlords have been liable for full business rates if their property has been empty for more than three months. The bill threatened to be far larger than a council tax bill: it was equivalent to nearly half the rent. In other words, if my office block had remained let, I would receive £30,000 in rent; but if the tenants moved out — say to the empty office building just up the road — I would have negative income of nearly £15,000 a year.

    The risk would be reduced if I owned a portfolio of commercial properties, in which case I might expect a certain proportion always to have tenants — at least until there was a recession and businesses shrunk or disappeared overnight. I’m sorry to say that I can’t afford to buy a whole portfolio of office buildings, but there’s a simple alternative if you want exposure to the sector: buy the shares of commercial property companies. In contrast to residential property, a sector which offers few FTSE companies to invest in, there are a number of prominent firms which allow you to own a spoonful of the very cream of commercial property, not just lock-ups in Streatham.

    Whenever I find myself in the City of London, I can now look up with pride, knowing that I own a tiny piece of the ‘Cheesegrater’ — perhaps the bolts which keep falling off. The building (122 Leadenhall Street) belongs to British Land, a FTSE100 company which also owns a host of retail parks and shopping centres. I also own a small lump of the ‘Walkie Talkie’ (20 Fenchurch Street): maybe a potted plant in its much-slated indoor ‘park’ or one of the windows blamed for frying a nearby parked car when they focused the sun’s rays. The building is owned by Land Securities, another FTSE100 giant.

    Shares in commercial property firms have outperformed even prime London residential property in recent years. Land Securities is up 22 per cent in a year, 90 per cent over three years. They also yield a little more. British Land pays 3.45 per cent: you’ll struggle to find a London flat with a net yield that high. Moreover, keep your shares in an Isa and you won’t have to pay capital gains tax or any tax on the dividends — unlike your buy-to-let.

    At the moment, the commercial property market in London seems a little stronger than the residential market. Knight Frank recently reported that of 6.7 million square feet of office space in London currently under construction, 46 per has been pre-let. The London retail market, too, is strong, with rents buoyant and only 3 per cent of space unoccupied. In spite of the changing nature of retail, with its unloved ‘big shed’ out-of-town parks, the best provincial sites are doing well. As for shops in fading town centres, they are not necessarily a bad investment — and changes to planning rules under the coalition have made it easier for owners to convert to residential accommodation, which generally has a higher value per square foot.

    But if you think house values are prone to boom and bust, try commercial property. Land Securities’ share price hit 2,333 pence in 2007. In 2009 it fell to 357 pence. At around 1,225 pence today it is still little more than half its peak. There are people who have lost that much on a residential property — like the lady who bought a house in Torquay which fell down a cliff — but they are few and far between. Common sense tells you that commercial property, being the preserve of professional investors, ought to be less prone to bouts of irrational exuberance and the inevitable fallout. But over the past decade, you have been safer in the company of the over-excited amateurs of the residential market.