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Four top tips on playing the UK commercial property game

In a low interest rate environment, commercial property can provide diversification and attractive yields. Here are four tips for investing in this asset class.

An attractive prospect

UK commercial property, with its attractive yield profile, continues to provide investors with solid levels of rental income and steady returns. It has historically performed differently from other asset classes, such as equities and bonds, and brings diversification benefits. Below are four tips for effective property investment.

1: Strength of tenant base

A strong tenant base is vital. Favour prime tenants on long leases. Established names offer confidence in terms of income security. Prime tenants include B&Q, Centrica, Co-Op and Tesco. Bear in mind economic growth will be strongest in the South East of England.

2: Be smart about retail

Consumer behaviour is changing rapidly, with a clear shift away from the high street towards online sales. Some businesses have responded well to managing this change but others have fallen victim to the decline of the high street and face obsolescence.

Invest in properties that play into current and future shopping trends. High street retailers may do less well than retail warehouse parks, which have the benefit of convenience, and larger spaces to accommodate a fuller range of products. Click-and-collect services are increasingly desired by consumers.

3: Be alive to alternatives

Office, retail warehousing and industrial names should form a solid core of property investment, but also look at alternatives, such as gyms and cinemas, which can provide added diversification and higher yields. Private healthcare is a maturing sector with a compelling risk-return profile. More people are paying for their own healthcare, and high quality hospital estates are being developed.

4: Future proof

Rising energy costs are putting pressure on household and commercial budgets. There is much debate in the property industry about the relationship between sustainability and investment performance. An increasing number of large retailers have stated their desire to become grid independent. The installation of photovoltaic (solar) panels on roofs adds to the attractiveness of buildings, helping to retain good quality tenants, increase lease lengths and maintain a high occupancy rate.

Ainslie McLennan is co-manager of the Henderson UK Property Unit Trust