Investing in small business office developments

The statistics for small business survival rates are relatively mixed with 91% of small businesses still trading after one year although unfortunately this falls to around 60% after five years. While there is no doubt that the competitive nature of the UK economy and the UK business arena is challenging, it seems that as a small business fails someone else is willing to step forward to take their place. As a consequence, while investing in small business office developments may not be cutting-edge it does have long-term potential for a number of reasons.

Prime office yields

A recent report by Cushman & Wakefield focused on prime office rental yields in December 2017 in cities right across the UK. It is fair to say that the vast majority of cities have experienced various challenges and prime office yields are on the whole at or near their 10 year low – anywhere between 3.25% in London’s West End to 5.75% in Newcastle. It is more difficult to calculate the average yield on small business office developments because they tend to be away from the limelight with varying degrees of accessibility.

However, a large number of small businesses in the UK are based online with many business owners having relatively little in the way of direct contact with customers and suppliers; everything seems to be done by email and telephone these days. This reduces the need for state of the art décor in small business office developments, the need for excessive car parking facilities and takes some pressure off running costs.

UK economy

The UK economy grew by around 1.5% in 2017 although it is fair to say that this level of performance is unlikely to be repeated in 2018 as we near the conclusion of Brexit negotiations. However, when looking at office developments there has been growing interest in London as well as regional sites such as Manchester, Birmingham, Newcastle, Leeds, Glasgow and Edinburgh – is the recent downturn coming to an end? This also comes at a time when some property developers are taking a step back, which is limiting supply, and increasing competition for existing stock.

Why look at small business offices?

There are a number of reasons why small business office developments are attractive on a long-term basis including:

• Financial assistance offered by local authorities on business rates
• Loans and grants available to many small businesses in their early years
• Relatively low cost base with many small businesses consisting of just the owner
• The emergence of not for profit landlords subsidised by local authorities

We know that many small businesses pay no business rates due to small business bonus schemes and other similar types of financial assistance. At the same time, many local authorities are willing to offer grants and loans to small businesses in their early years to encourage their development; in the hope that eventually tax returns will fully payback their financial investment. It is also interesting that many small businesses consist of just one employee, the owner of the business, and as such costs are relatively low. One interesting issue is the emergence of “not for profit landlords” which are often subsidised by local authorities (similar in nature to housing associations).

Small business rental yields

The value of any investment, whether commercial or domestic, revolves around its rental income and potential for capital appreciation. Developments which tend to have limited capital appreciation often offset this with higher rental yields and vice versa. So while the likes of London prime office yields are currently running at around 4%, Newcastle at 5.75%, Glasgow at 5.5% and Cardiff at 5.75%, there may be opportunities to lock in higher rental yields (with the limited capital appreciation) when looking at small business developments.

In many cases, there is added value and added potential for small business office landlords who are able to offer an array of additional services on an ad hoc basis. These may take in everything from a telephone answering service to the provision of meeting rooms, business courses and advice right through to catering facilities. All in all, there is significant long-term potential when looking at small business office developments but you need to look at the wider picture. This will include rental yields and potential capital appreciation but also additional services and financial assistance from the UK government and local authorities.

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