Commercial business lets yield better returns

Rental income from offices and industrial units on rural estates grew by 3% in 2006, according to new research from property firm Savills, suggesting a rural location is becoming more popular among businesses

Savills’ Estate Benchmarking Survey showed that the average return on investment from commercial lets in 2006 was 16.5%. Average income from commercial property assets represented 13% of rural estates’ gross income and amounted to £46/ha (£18.50/acre).

Income from agriculture accounted for just one-third of gross revenue compared to more than 60% ten years ago. The strongest markets were in the east, south-east and south-west of England.

Light industrial lets performed best, with rents growing by nearly 11% in 2006 to average at £3.50/ sq ft. But despite some office rents in areas of high property value hitting £13.50/ sq ft, average returns slipped 2.4% to just over £8/sq ft.

Savills said 60% of tenants surveyed were relocating from an urban environment. The same amount of new lets were taken up without any active marketing.

The firm’s estate management director Michael Horton said income from commercial property was becoming increasingly important for many rural estates, but cautioned that it was not a cash cow.

“For anyone looking to develop this asset, careful consideration must be given to the quality of space provided, its location and competitive tenancy terms to minimise vacant periods.”

A potential tax threat could restrict growth in the sector, Mr Horton said. “Looming on the horizon is the government’s proposal to introduce a planning gain supplement during 2009. This may have an impact in these types of diversification because estates that are implementing a planning consent to develop commercial workspace could be subject to tax.

“Potentially, landowners could be deterred from undertaking diversifications of this kind at a time when income from agriculture continues to contribute less to an estate’s bottom line.”

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