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How is ‘working from home’ affecting commercial properties and pension portfolios?

| Simon Shaw | 1 August 2023

The mandate to work from home in March 2020 made the world notably smaller for everyone - but the opposite is now true.

Working from home is enabling workers to freely relocate and access vocations that before might have seemed impossible. While this is positive news for many, it presents problems for the commercial property sector which relies on frequent footfall that ‘absent’ employees can’t fulfil.

Investors with stakes in the sector must reassess their assets and their strategies in this new normal to ensure they’re managing risks as shrewdly as possible. This is especially true for those with investments which will ultimately affect the yield of their pension.

Cultural transformation: reshaping the office

Almost half (44%) of UK workers now work from home either full-time or on a hybrid basis - meaning they split their time between the office and their home.

These figures from the Office for National Statistics make it impossible to overlook the radical shift Covid-19 set in motion. What people expect from their employers has changed, as has how they leverage themselves as assets.

It’s clear that the impact of working from home is a lasting cultural transformation instead of a transitional trend - and this is having visible impacts on the property market.

Reevaluating investments: commercial property in 2023

While working from home is visibly on the up, office space is still in demand. Only 10% of people working from home want a fully-remote model - which means a resounding 90% value variation and a healthy split of time.

What does this mean for commercial property investment? For those worried about dwindling investment in office sites, it offers respite and reassurance. The market is stabilising and doubt is edging towards the rearview, which is confirmed by the Q1 2023 RICS UK Commercial Property Survey.

While businesses do need to contend with the real-time issues of higher utility and labour costs, vacancy rates are down, there is more demand for usable commercial space. Meanwhile, although rents are (understandably) higher, it seems landlords are more willing to offer immediate incentives to draw in new tenants - such as temporary rent concessions or abatements.

This extends across office, industrial and retail spaces, which bodes well for the market and implies that the shaky conditions of the last three years are finally showing solid signs of stabilising.

Commercial property prices are down - but rising again

While interest is increasing, we must acknowledge that commercial property prices are down slightly - investment is reduced in some areas (such as industrial properties) by as much as 30%, according to CBRE figures. The value of assets has fallen by 20% since July 2022 and, with lending conditions and high-interest rates creating an unfavourable environment for fledgling investors, this isn’t optimal.

However, it is on the upturn and this is an important distinction.

Investors in the commercial property sector shouldn’t rush to sell their assets - or reassign the investments that underpin their Self-Invested Personal Pensions (SIPPs).

With SIPPs, as with any investment, the trick is managing risk and knowing when to act.

Manage risk, don’t flee from uncertainty

While property prices in the commercial sector are down on earlier figures with CBRE statistics showing capital values have fallen by 20% since July 2022, the overall sentiment is increasingly positive. Even office workers who are working from home are doing so increasingly less frequently, with a hybrid model meeting the demands of most employers and employees.

Tying your SIPPs into properties expected to enjoy an upturn in interest and demand in the coming months is a tactful decision. Indeed, doing so is likely to be beneficial to those looking to boost their pension pot with real-time investments in the commercial property sector.

To manage investments in commercial properties in this changing environment, it’s best to seek expert advice to analyse your portfolio and suggest the next steps.

Depending on your holdings, a wise choice might be to invest in sites with good accessibility and small-medium size footprints, rather than excessively large offices. As companies experiment with more nuanced ways of working, locations that facilitate access from multiple fronts are likely to prove more desirable than those with the most imposing edifice or space per square metre. Think about access and availability over the more traditional capacity and yield.

Graeme Hills, head of legal services and tax director at Duncan & Toplis, explains: “Despite the uncertainty in the commercial property sector in recent years, the overall outlook for pensions is looking very positive.

“Although fewer people are spending all their time in the office, this does mean a reduced cost of travel releases more funds for potential investment into their own pension. With the recent changes on increased annual contributions and the removal of the annual allowance, saving in a SIPP is looking even more attractive. If the trend for commercial property prices continues upwards, the outlook is promising indeed for pension savers.”

Adjusting expectations

The commercial property market continues to experience many challenges as the needs of businesses change.

For those developing or renovating office and commercial property, the ongoing increase in material and labour costs linked with the increases in interest rates is bound to feed into the asking price of these buildings for the investment market. Although landlords are adjusting rents to take account of these increased costs both developers and investors may have to adjust their expectations.

If you’re unsure of how the current market affects your income or of what steps to take to best safeguard your investments, get in touch today.


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