How can the price of a commercial shopping centre be cheaper than a residential home?
- TBA
- Feb 28, 2024
- 3 min read
Updated: Feb 25
To most people, a shopping centre represents high volume business trade. Naturally, a shopping centre would be expected to be valued much higher than any ordinary household property.
Despite this, a commercial shopping centre in South Wales was recently sold for only £615,000, down £400,000 from the initial guide price.
Not to mention, the average price of residential property in England is currently actually £685,200!
So, how could this have happened?
1. Initial upfront investment costs
From a macroeconomic perspective, British business has suffered significantly, particularly after Brexit and the coronavirus pandemic.
In addition to this, inflation has created huge pressures for businesses and consumers alike, and the response by the Bank of England in raising interest rates has placed further pressure on the wider economy.
Jemma McAndrew from Cushman & Wakefield has observed that in the current retail market, any decision to operate a shopping centre and attracting tenants would require a significant capital injection.
The cost of operating retail property, particularly one as large as a shopping centre, represents significant upfront costs for any prospective buyer. This resulted in the price being pushed down much lower than originally expected.
2. A sluggish retail industry
The low sale price may reflect a wider industry trend – that the retail industry is experiencing sluggish growth. Alongside an increase in operating costs, rising energy prices and higher store rent and taxes, the Bank of England’s decision to raise interest rates has further increased the cost of running a business.
You may be aware of Wilko, a well-known high-street chain that recently declared bankruptcy. PwC have been appointed as administrators to seek a purchaser to take over the business. Wilko is symbolic of the difficulties faced by the wider retail industry.
Any collapse of a retail business then results in further unemployment, eventually supressing consumer demand, forming a ‘vicious cycle’. The rise of e-commerce has further placed pressure on the traditional retail industry.
The low sale price of the shopping centre can be attributed to these issues.
What type of property produces higher return rates?
Despite the low initial purchase price, a commercial property may not necessarily be a better investment than residential property.
Commercial properties may have greater scope for appreciation, but any price changes are subject to significantly more factors. Besides wider retail industry concerns outlined in the previous section, there is also a need to attract corporate tenants in order to make the investment worthwhile.
When examining shopping centre asset transactions (e.g. commercial rentals), only £521m worth of transactions was conducted in the first half of 2023, compared to £919m in the first half of 2022.
On the other hand, the average rate of return for shopping centres remained relatively stable during the first half of 2023, despite the decreased transaction rate.
More recently, there has been an uptick of commercial property purchases made by owner-occupiers, existing stakeholders and local authorities seeking to manage their city-centres. These properties are then transformed from traditional retail to other forms of operation in an attempt to boost footfall.
If you’re planning on buying or selling commercial property in the UK, be aware of the tax implications – stamp duty, capital gains tax and VAT are all applicable! Contact TB Accountants for more advice.
