A rebound in UK’s commercial property – should you invest?

UK commercial property’s three-year bear market finally appears to be over, says Max King

(Image credit: Getty Images)

By Max King

published 4 days ago

It has been a long winter for the UK’s commercial property sector, but at last it seems spring is in the air. Savills reports the vacancy rate in the City and West End of London office property market has fallen from a peak of 9.5% in late 2023 to 7.4%, although it is still comfortably above the long-term average of 5.9%.

The rate of growth in online shopping has slowed to the mid-30s in percentage terms, including food, and shopping centres have learned to adapt. Customers see them as a destination. They want to browse in shops, visit cafes and restaurants, and go bowling. Retailers have learned that returns from online shoppers are expensive to handle, so shops are now not just sales outlets, but also showrooms for buying online.

In late 2024, Land Securities paid £490 million for the Liverpool One shopping centre, “one of the premier shopping centres in the UK”, it says. It expects to generate an income return of 7.5% and to grow that figure “meaningfully” over the next few years.

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A lot of capital has gone into “big-box” distribution hubs, so rental growth is likely to slow in that subsector, says Nick Montgomery, the manager of the Schroder Real Estate Investment Trust (LSE: SREI). But there is a supply shortage of estates with multi-let industrial and distribution units. Meanwhile, the market for the “alternative” property sector, including hotels, self-storage, residential and student accommodation, is mostly healthy.

“There have been plenty of false dawns since the market peaked in late 2022,” says his colleague Richard Gotla, “so it feels a bit like Groundhog Day.

Values have fallen 20%-25% since the peak – less than the 40%-45% [in 2009], but there has been less debt in the sector than then. In addition, rental values were flat then but have risen 10% since late 2022.”

London has returned to the office

Gotla says that “the big story is how little development there has been in recent years”, although it doesn’t seem that way in central London. The return to the office has been more advanced in London than in the regions, but the demands of occupiers have changed. Tenants want more facilities, better energy efficiency and cafes, rather than a small kitchen with a kettle, a microwave and a vending machine.

However, construction costs have gone up sharply, and buildings quickly become obsolete: “they start to depreciate when the builders leave”, says Gotla. With initial rent-free periods of up to three years, leases of up to ten and obsolescence thereafter, “it has become very difficult for developers to make the numbers work”. As a result, rents “are going nuts: £150 per square foot in the City, £250 in the West End”.

This is pulling up the secondary market. Refurbishing a quality building in a good location is much cheaper, allowing landlords to offer shorter leases (around five years) at far lower rents. Refurbishments comprise a large part of Derwent London’s (LSE: DLN) portfolio, and it reports strong demand from tenants. The shares trade on a discount to net asset value (NAV) of 40%.

The shares of Great Portland Estates (LSE: GPE) trade on a discount of 30%, the trust having diluted NAV with a £350 million rights issue at a discount in May 2024. Such issues are never popular with investors, but they reflect managements’ enthusiasm about the outlook. In April, Norway’s sovereign wealth fund paid £570 million for a 25% stake in Shaftesbury Capital’s Covent Garden estate, validating its NAV and reducing its debt. The shares have since risen over 20%, but still trade at a discount of 30% – despite reporting strong performance last year with rental income up 6% and earnings 20% from its West End estate, primarily retail and leisure properties.

Sector giant Land Securities (LSE: LAND), with £10 billion of assets and a 30% discount to NAV, has been adding to the retail segment of its portfolio. Rival British Land (LSE: BLND), with £8.7 billion of assets, has focused on “campuses” such as Broadgate and Canada Water. These encompass offices, but also retail and leisure outlets, and the public spaces in between. A quarter of its assets are in retail parks and 10% in shopping centres. Its shares are on a discount of 30%.

SREI is much smaller, with net assets of £300 million, so it is not going to own any trophy assets. But its smaller size enables it to look for value in areas the larger investors ignore. Its shares trade at a 20% discount, but the yield, close to 7% and fully covered by earnings, is attractive. Moreover, rental income of £30 million is well below “reversionary rent” of £40 million – the rent its properties would command if re-let now. Less than 10% of the portfolio is in London and over 40% in the North, while multi-let industrial accounts for half the portfolio, offices a quarter and retail warehouses half of the rest. Although its debt is significant, 75% of it is locked in for 11 years at a cost of just 2.5% a year, so it has been little affected by higher rates, but will benefit markedly from an improving market.

Schroders forecasts a total annual return of 8%- 10% for UK real estate over the next four years, which would ensure both higher dividends and capital appreciation. The group is keen to add value to the portfolio from repurposing units on its estate and redeveloping tired buildings. Montgomery also sees opportunities in affordable housing in the inflation-linked income from hotels, “but it is more interesting to be an owner and operator than just an owner”.

Sentiment in the property market is vulnerable to higher gilt yields and global factors, he warns, but with interest rates likely to trail lower, there should be a recovery. “With a shortage of supply, we don’t need a surge in demand to see decent returns.” Share prices in the sector have started to discount such a recovery, but there should be much more to go for.

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Belt and Braces Trusts, you would have earned above market dividend yields as you waited for the market to correct. If you can buy a pounds worth of physical assets at a discount and still receive income, it’s quite a compelling case.

If you are lucky and your Trust gets a bid, you can take your profit and try to do it all over again, shorting your time frame, the only shorting the blog recommends, if not you can re-invest the dividends back into your Snowball. As the prices rose the yields fell so not so many compelling Trusts left.

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When CTY fell to 300p the dividend was 19p. The buying yield 6.3p, with the current dividend 20.6p a gentle increase, you will receive the buying yield as long as you own the Trust, assuming the dividend isn’t cut.

The current price 473p a running yield of 4.35%, the price including earned dividends but not re-invested back into CTY 566p.

With the benefit of good ole hindsight, if the dividends had been reinvested back into CTY the price would be 600p.

In a few short years you would have achieved the holy grail of investing in that you could take out your stake and invest it in another high yielder and receive income at zero, zilch risk from a share in your Snowball.

Everything crossed for another market crash ? If not given time the share could double again, you could even take the risk of re-investing the dividends from CTY back into the trust, especially if the price had fallen.

GL

3 world-class dividend shares to consider for passive income!

Searching for the best dividend shares to buy for a large and growing long-term passive income? Here are three of my favourites.

Posted by

Royston Wild

Published 25 May

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.

The London stock market’s a great place to find high-quality companies for passive income. The FTSE 100 and FTSE 250 are packed with shares with deep balance sheets, market-leading positions, and a strong commitment to making shareholder distributions.

This often makes them ideal stocks for investors seeking a large and growing second income over time. With this in mind, here are three world-class dividend shares I think are worth serious consideration.

Property hero

As a real estate investment trust (REIT), Primary Health Properties (LSE:PHP) receives tasty breaks on corporation taxes. And in exchange, it must pay at least 90% of profits from its rental operations out in the form of dividends.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

This doesn’t necessarily make REITs dependable income shares. There’s always a risk that earnings can underwhelm if a trust’s properties become empty or if rent collection issues arise.

Primary Health’s vulnerable to such issues, although its focus on the defensive medical property sector greatly reduces such threats. It’s why the FTSE 250 company has raised annual dividends every year since the late 1990s.

City analysts are expecting this proud record to continue over the medium term, too. And so the trust’s 7% dividend yield for this year rises to 7.5% by 2027.

City slicker

City of London Investment Trust‘s (LSE:CTY) history of unbroken annual dividend growth stretches back even further.

The trust — which focuses on shares listed on the London Stock Exchange — has raised yearly cash rewards for a staggering 58 years. It’s committed to holding cash during good years to pay out when downturns come along, offering a smooth return over time.

With exposure to almost 80 companies spanning different sectors, City of London’s well equipped to weather weakness among one or two holdings. What’s more, around 60% of its investments are in large-cap firms worth £5bn and above, providing extra resilience.

The trust’s forward dividend yield currently sits at 4.5%. That beats the corresponding average for both FTSE 100 and FTSE 250 shares by around a full percentage point.

While it carries greater regional risk than trusts holding global shares, it remains a top dividend stock to consider.

9.4% dividend yield

For my money, Legal & General (LSE:LGEN) is the best FTSE 100 dividend share that money can buy. And so it’s the largest single holding in my own Self-Invested Personal Pension (SIPP).

Factoring out a brief freeze during the pandemic, dvidends here have risen every year since 2009. And over that period, the size of the payouts have blown the large-cap average out of the water.

It’s a trend City analysts expect to continue, meaning a huge 9% dividend yield for 2025 eventually rises to 9.4% by 2027.

Put simply, Legal & General is a cash-generating powerhouse, giving it the financial strength to consistently pay large dividends. With its Solvency II ratio rising to 232% as of December 2024, the company has a strong buffer to support payout forecasts, even if weak consumer spending damages earnings.

Supported by structural growth across its product suite, I expect Legal & General to remain a top passive income stock for my portfolio.

If you are considering buying PHP for your snowball you need to factor in the outcome of their ongoing bid for Assura.

The UK markets are closed today, but the Snowball will have earned £82 before they re-open tomorrow.

One problem with Compound Interest it takes time to make noticeable growth.

An good example would be the thread Snowball, where if you could double your income stream in seven years instead of ten, you could start to re-invest

7 years 14k

14 years 28k

21 years 56k

yep, an interest rate of 56% on seed capital, no guarantees though.

As your intention is to live off the dividend stream when you retire, you would have no inclination to kill the Golden Goose that lays the Golden Eggs so you would have no interest in the value of your portfolio in 21 years time.

If you had 100k of your hard earned you might not wish to take the risk of a strategy new to you. Those who have a modest amount to invest but can add new funds on a regular basis may be more willing to take the chance. If you are still undecided look at the compound growth of house prices.

Using data from Nationwide Building Society, the average UK house price has risen from £1,884 in1953 to a staggering £270,867 in the 1st quarter of 2025.

I’ve just earned £1,104 of passive income in 2 weeks, thanks to blue-chip UK dividend shares

Story by Harvey Jones

I’m a late convert to the joys of passive income. In my early days as an investor, I mostly focused on growth. I didn’t know what I was missing.

The last month has been a rewarding one, with a string of dividend stocks in my self-invested personal pension (SIPP) dishing out their half-yearly payouts. And they’ve been in a generous mood.

On 9 May, M&G (LSE: MNG) kicked things off by paying me a chunky £458. That was the biggest of the lot, and unsurprisingly so, given that it has the single highest yield on the FTSE 100 at 9.31%.

M&G is a brilliant dividend stock

That’s what attracted me to the wealth manager in the first place. But as ever with a supersized yield like this one, it’s important to check whether it’s sustainable.

Yields are calculated by dividing the dividend per share by the share price. So when a stock price falls but the dividend stays the same, the yield rises. A really high yield can therefore signal trouble. I don’t think that’s the case with M&G.

Its shares are up a modest 8.6% over the last year, and 77% over five years. That latter number flatters it slightly, as it’s measured from the 2020 pandemic lows, when every stock was on the floor.

Risks and rewards

I’m happy to take the risk to get a higher return. I’ll mitigate it by holding a spread of different stocks, which I plan to keep for the long term. That helps me ride out short-term volatility.

As it turned out, 9 May was a red-letter day as FTSE 100 housebuilder Taylor Wimpey paid me £165. It’s another ultra-high-yielder, offering 8.04% on a trailing basis. No savings account can match that.

On 14 May, FTSE 250 insurer Just Group chipped in £45. All contributions welcome, even modest ones. Given the Just share price is up 38% in 12 months, and 75% since I bought it in November 2023, I’m not complaining.

Lloyds Banking Group picked up the pace by paying me £207 on 20 May, and insurer Phoenix Group Holdings kindly sent me £229 the day after.

Compound growth

In total, I’ve received £1,104 of passive income in a fortnight. I haven’t spent a penny of it. Instead, I’ve reinvested the lot straight back into the same stocks, which means I may earn even more dividends next year.

The fun is over for now but I should enjoy another income spree in the autumn, when the next set of dividends land. I’ll plough those straight back into my SIPP, to help my pension compound and grow over the years. Then when I finally retire, I’ll draw them as income, to top up my State Pension. With luck, I’ll be getting a lot more by then.

The proof of the pudding is in the eating. Below is the journey of the Snowball to date.

The Snowball was started with a seed capital of 100k and the first dividend was earned on the 25/11/22.

Dividends to date all year end.

2022 £1,609.21

2023 £9,422.59

2024 £10,796.00

The actual amount of dividends varied as some companies paid a special dividend which isn’t repeatable.

The plan copied below was to increase the Snowball by compound growth of 7% per year.

The snowball effect in investing refers to the power of compounding, where small investments grow exponentially over time. This concept is central to long-term wealth building, and Warren Buffett himself has famously used it to amass his fortune. As the Snowball rolls along the Snowball gathers more mass and continues to grow in size.

How It Works:

1. Reinvesting Profits – When you reinvest dividends or returns, your investment base grows, leading to even larger future returns.
2. Compounding Interest – Earnings generate more earnings, creating a cycle of exponential growth.
3. Consistent Contributions – Regularly adding to your investments accelerates the snowball effect.

Example:

Imagine you invest in dividend-paying stocks. Over time, as dividends are reinvested, you acquire more shares, increasing your future dividend payouts. This cycle continues, leading to massive wealth accumulation.

Chat GPT

The plan.

Year End Dividends

2023/£7,000

2024/£7,490

2025/£8,014

2026/£8,575

2027/£9,175

2028/£9,817

The current projection for 2025 is £10,000 because the yields on most REIT’s and Renewables were above 7% for the period above. Note that most REIT’s have corrected in value and as the price rises the yield falls. Also remember most Investment Trusts try to increase their dividends by inflation or above.

The Snowball is well ahead of the time line with the current expected dividend equal to the year end of 2028.

The fcast for next year could be increased to £10,700 with a target of £11,000 but early days for that.