Commercial Property Construction Falls as Investment Rises Despite Tax Changes
The commercial property market in the UK is suffering a bout of extreme confusion. Many will attribute this to Brexit, though it is unlikely to be whole story. Certainly, it may be that Brexit uncertainty has compelled developers to decelerate construction of commercial property. But why, then, is investment in the sector booming?
There may be more questions than answers. Amid the current confusion, commercial property managers have an increasingly important job to do, navigating between a changing tax environment and low interest rates to maximise profits.
Commercial property construction falls again…
The Chartered Institute of Procurement and Supply has reported that both commercial property and civil engineering activity fell in March. This follows on from a fall in February, and is the first consecutive fall since 2016. The fall was enough to offset a strong housebuilding sector.
The CIPS’s business activity index came in below the crucial level of 50. At 49.7, it indicates contraction in the industry. For the first quarter, the average level of 50 indicates stagnation in the market. It also represents a significant fall from the fourth quarter of 2018, when the average was 53.1. Construction of commercial property fell at its fastest pace for 12 months.
…though Employment & New Orders Rise
While activity fell, the survey of 150 construction companies also found that both new orders and employment in the construction sector rose marginally. This runs contrary to the fear that recent weakness in the sector is not a blip, but the start of a longer downturn.
Concerns about the prospects for the UK economy have fuelled risk aversion, with the blame laid squarely at the feet of Brexit. Falling construction, an improved order book, higher employment, and concern for the economy. Confused, indeed.
Investment in London’s Commercial Real Estate Booms…
London has been hit hardest by the uncertainty caused by Brexit. Yet investment in commercial property in the capital is booming, according to data from Savills. Investment volumes are up on last year, and even up on the year before the EU referendum:
- Investment in commercial property in central London hit £3.2 billion in the first quarter of 2019
- An increase of 28% on the first quarter of 2018 when investment was £2.5 billion
- More was invested in the first quarter of 2019 than the £3.14 billion invested in the first quarter of 2015
Savills found that domestic and US investors are leading the charge into commercial property. US buyers only accounted for four property purchases, but the total value was more than £1.4 billion. Domestic investors acquired 23 assets with a total value of a little more than £900 million.
The largest single deal was the purchase of 25 Canada Square in Canary Wharf by Citigroup. This £1.1 billion deal is the eighth acquisition above £1 billion in the last five years.
The pace of property transactions has increased through the first quarter, too. There were 15 commercial property transactions in January and February, and 24 deals in March.
…despite tax changes for investors
The tax rules have changed for non-resident property investors. Since 6th April 2019, non-residents will pay a new tax charge on disposal of UK residential and commercial real estate. There will be a new tax charge on gains made from:
- ‘Direct’ sales of UK real estate
- ‘Indirect’ disposals of UK ‘property rich’ interests
These new laws remove the tax advantage that non-resident investors previously had over UK-resident investors. Now, non-UK-resident companies will pay tax at 19% on the gains from sale or disposal.
(By the way, this isn’t tax advice!)
What’s the bottom line for commercial property managers?
The burning question: what is the bottom line for commercial property managers? It’s clear that there is a two-tier market at present.
On the one hand are the construction companies. They seem to be hedging their bets. They are concerned of a market downturn, while simultaneously preparing quietly for an upturn. They have slowed progress on construction, despite order books increasing, to protect themselves from a potential downturn in the economy. Meanwhile, they are hiring in readiness for a boom, should the post-Brexit environment turn out better than expected. In this respect, the uncertainty from Brexit is causing confusion.
On the other hand, we have investors. They seem to be far more confident in the future. For them, Brexit holds no fears, even in London. This could be for several reasons. For example, in the low interest rate environment, property offers potential yields unachievable in most other asset classes.
Clearly, investors believe in London (and in the UK). The current malaise in the market is seen as an opportunity to acquire commercial property at good value for long-term returns. There is a structural shortage of property in central London. Demand remains strong. Despite the prospects of paying taxes on disposal, non-UK-resident investors are buyers of London.
For commercial property managers, the growth of investment in the sector is excellent news. We expect the number of property manager jobs to grow, and the extra demand should be good for salaries in the sector.
For a confidential discussion about the current property manager roles available, and to discover how we can help you progress in your career, contact your Macdonald & Company sector team today.