Valued as an income stream
Unlike a house, a commercial building is valued almost mechanically: take the annual rent, divide by a yield that reflects the quality of the covenant, the length of the lease and the desirability of the location. A £500,000 rent on a 6% yield values the building at roughly £8.3m.
Two things therefore move value: the rent, and the yield. A small shift in yield moves capital value enormously — which is what happened when interest rates rose and property yields had to reprice against risk-free gilts that suddenly paid 4%.
The covenant is the asset
A lease to a FTSE 100 company with 15 years unexpired is worth far more than an identical building let to a local start-up on a three-year term. Institutional buyers are really buying a credit exposure with a building attached.
UK leases have shortened dramatically over recent decades — 25-year terms were once standard, 5–10 years is now common — which has reduced the bond-like quality of the asset class.
Three sectors, three very different stories
Retail has been repricing downwards for a decade as online sales took share; secondary high street shops in particular have seen value falls that in some cases exceed 70%.
Offices face a structural question about hybrid working that is not yet resolved, with a sharp divergence between prime, energy-efficient buildings that still let easily and secondary stock that may never let again at previous rents.
Industrial and logistics was the beneficiary of the same shift — warehouses serving e-commerce saw rents and values rise substantially, then partially retrace as rates rose.
The open-ended fund problem
UK open-ended property funds promised daily dealing on assets that take six months to sell. Several suspended redemptions after the 2016 referendum, again in 2020, and several have since wound up entirely. The FCA has consulted for years on notice periods.
This is the clearest available case study in liquidity mismatch. The underlying asset's liquidity, not the fund wrapper's promise, is what you actually own.
How you would actually trade it
Direct ownership is a business: due diligence on title, lease, tenant covenant, dilapidations liability, EPC rating (properties below the minimum standard cannot legally be let), service charge and business rates.
For most investors, exposure means REITs — listed, liquid, and priced daily by the stock market rather than by a valuer — or a closed-ended property investment trust. Both trade at discounts and premiums to net asset value, which is itself informative when valuations are stale.
What goes wrong
- Yield repricing driven by interest rates can cut capital values sharply without any change in rent.
- Void periods. An empty building generates no income while still costing rates, insurance and security.
- Tenant default removes the income the valuation depends on.
- Obsolescence. EPC rules, cladding and specification standards can make a building unlettable without major capital expenditure.
- Liquidity mismatch in open-ended fund structures.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.