Syndicated property investment provides investors with the opportunity of becoming part owner of a quality tenanted commercial property and receiving a pro-rata share of the rental income and any future capital growth.
SEVEN benefits of participating in a Rougemont syndicated property:
There has been a lot of talk in recent months about a looming commercial property crash and horror story headlines like “London bubble set to burst” but, in reality, these scaremongering tales are unfounded and premature.
Commercial property investment continues to be one of the safe havens for investor cash and the latest report from CoStar, a leading commercial property research organisation, shows that the appetite for these assets continues to grow.
The UK Commercial Property Investment Review Q2 2015 shows that we are on track for another record year of property investment and both the capital and the regions are continuing to be hugely attractive destinations for investors both at home and overseas.
In this latest blog I consider some of the findings of the CoStar report and consider what lies ahead.
There’s some fantastic insights in this video from CoStar, but perhaps the most important message is by founding partner of GM Real Estate Tony McCurley who says the UK is “on everyone’s shopping list”.
London remains the top global city for investment while the whole of the UK was the most active investment market in the world after the US over the past 12 months. We’ve seen another phenomenal year with £73.6bn poured into commercial property and it isn’t showing any signs of slowing down.
We saw a total of £16.8bn invested in the UK in Q2 of this year, which was up 8% on the previous year, and £6.5bn of that money came from foreign investors, an incredible 44% increase on 2014.
Despite fears that falling yields in an overheated London market had seen it pass its peak, the research showed that the capital bounced back with investment surging 61% quarter-on-quarter and attracted £8.7bn in investment, up 46% on last year.
The UK regions also remain a hugely popular destination for investors as they continue to deliver the best yields and rental growth. For example, investment in the North East was up by 131% on the five-year quarterly average, with £308m invested in commercial property.
The UK remains one of the most attractive investment destinations for a number of reasons. The main reason is the continuing strength of the economy and its fast growth. However, traditional draws like the market transparency and political stability have always provided a high degree of comfort for investors.
When you couple this with the potential for further growth in the regions and the continuing strength of the capital, it makes the UK an obvious choice.
Another major factor is the continuing instability around the globe. With the neverending woes in the Eurozone, conflict across the Middle East and Russia and China’s economies in turmoil, investors inevitably are looking to find safe havens for their money and the UK is proving to be a solid bet.
The report also shows its good news across the individual investment sectors. The office sector surged ahead in Q2, accounting for almost half of all investment. The strongest performers were London and the South East but I expect the regions to get stronger over the course of the year as we’re continuing to see a rise in demand and a number of new developments are now finally coming through the pipeline.
This rising demand coupled with a lack of available office space is also turning into optimism for developers and that will also see the return of speculative projects in the months to come.
Again industrial was a top performer and that is reflected across the country. The only blip was a drop in retail investment – which fell to its weakest level in two years – but that will recover in the second half of the year due to a number of major centres due to come to the market.
Yield compression also resumed strongly, reversing the brief upward movement we saw in Q1. The average all property yield compressed to a five-year low of 6.88% as yields fell in all sectors. With furious competition continuing in London, office yields also sank to a new low of 4.2.
In my own opinion, property investment will remain to be a safe bet. As I said at the start, the likelihood of the bubble bursting is slim. While London is seeing a significant slowdown, I believe that’s just a sign that the capital is now stabilising and the regions still have plenty of room for growth.
This growth and soaring occupier demand will fuel confidence for investors and developers alike and we’ll see a raft of new speculative development in both the office and industrial sectors in the regions. There’s also still a huge weight of money looking for a home and that will deliver robust trading in the months ahead.
Yes, there are still some draconian elements to the market that dampen spirits a little – the threat of empty rates still continues to frighten developers – but that will only stall values briefly while everyone catches up.
The threat of an interest rate rise also still looms large on the horizon, but any increase will be very slow as the Bank of England looks to nurture the growth in the economy.
There’s been much talk of the impact of a Brexit – Britain leaving the EU – and even though this is unlikely, it will have little impact on property as it’s rarely heavily affected by short-term politics.
Couple all this with the continuing instability in a number of economies and nations around the world and the UK will continue to remain on every investors shopping list.
Much has been said of late about New York reclaiming its crown from London as the world’s number one destination for commercial property investment. Granted, these two global giants constantly jostle for the top spot, but what is interesting about this is what it means for property investors in the UK.
The eagerly-anticipated annual survey from the Association of Foreign Investors in Real Estate always causes a stir and, despite being released a few weeks ago, the implications are still being debated and it has led to a wealth of further articles arguing that the super-wealthy will also turn their back on the UK capital in favour of The Big Apple.
In truth, London will undoubtedly claim the crown again and these findings are being fuelled by the incredible strength of the property market in the capital over recent months. London has seen massive amounts of investment, most notably from overseas investors, and it has overheated. Prices are high and it has become extremely difficult to secure decent returns. Unsurprisingly, investors are looking elsewhere.
But, what does this mean for investors who still want to put their money in the UK which is seen as a stable safe haven for commercial property funds?
Investors looking beyond London
For most, they are now looking to the UK regions. With development only just firing up again in our regional centres, supply has become limited and that is fuelling rent and yield rises. Overseas investors are already looking at regional opportunities, but the biggest spender in this sector are the UK institutional funds.
Our homegrown funds increased their exposure to regional markets by more than a third last year and when you add in property funds, occupiers and private investors, their total share of the regional market now stands at 60 per cent.
Domestic investors have stolen a march on the UK regions and are reaping the rewards. It’s inevitable that overseas investors will soon follow suit, but there are still some great opportunities in the UK for those who know what to look for.
The ‘Golden Triangle’ for property investors
Another recent piece of research named York, in the heart of Yorkshire, as one of the best cities for investment in the UK. Rougemont has already invested in York, recognising its continuing quality and potential for further growth, and this city is a prime example of what regional investors should be looking for.
York is one of the UK cities that are often referred to as “Little Londons”. Others that fall into this category include Bath, Cambridge, St Albans, Sevenoaks and Oxford and that’s because they all share similar characteristics.
Each city has solid commuter connections, a strong and growing economy and offers excellent quality of life. Estate agents refer to these key ingredients as a “golden triangle” for homebuyers and it’s equally as relevant for commercial property investors.
In Yorkshire, the golden triangle for investors is often referred to as “Betty’s Triangle”. It’s named after the world-famous tea shops and links the affluent tourism hotspots of Harrogate and York with the economic powerhouse of Leeds.
Image courtesy of Dominic Harness at FreeDigitalPhotos.net
This triangle has extremely solid transport links, London is two-hours by train and it has an international airport, the economy is diverse and growing strongly, and the quality of life is exceptional – quality homes and schools, incredible countryside and rich and varied tourism and leisure are on offer.
Put these together and you have a strong draw for business, and with new business comes new commercial property opportunities.
Investing in properties with potential
There are many examples of these golden triangles around the country and they don’t have to be on a regional scale to offer investors great opportunities. Look for the winning ingredients and, even if it’s a relatively small town, you can be sure to find properties with potential.
We’ve talked at length before about Rougemont’s continuing efforts to find the “pockets of value” when we are hunting for syndicated commercial property investment opportunities and they are still out there.
Critically, investors now have to take more risks if they want to match the returns they have seen over the past five years. Just a year ago, we could buy 10 year leases to quality tenants in grade A located buildings for 7.5%. This is now 6.5% and that means investor expectations have to shift and more confidence has to be placed in the improving occupier market. Long leases are almost none existent and where they are available, the return are not attractive.
Investors now need to look at investments with unexpired short and medium leases but with very good reletting prospects to mitigate the risk of a void income. The downside of this is that the capital value of the property will decrease as the lease length shortens, but if the location and rental level are right, investors stand to benefit from capital growth once a new long lease and rent has been restructured. The income returns applicable to these investments are usually 7.5% – 8% plus.
Ultimately, competition is fierce. The UK funds are moving heavily into the regions and the overseas investors won’t be far behind. However, if you look for the key ingredients and look for properties with potential for growth and/or alternative uses, there are still some great opportunities for investors.
I appreciate many of you will have different ideas and tips on what to look for in property investment and it would be great if you could share them in the comments below. Likewise it would be interesting to gauge appetite for short term income investments but with very good prospects of medium term capital growth.
After a stellar 2014 that saw the recovery take hold, 2015 is already demonstrating that the property cycle is firmly under way. In the first two months of this year, transaction volumes are up 20% on last year at £6.6bn.
That follows a record-breaking 2014 which saw £65bn invested in property – the highest level of investment on record and 27% above the ten-year annual average. Perhaps most surprising is the fact that investment volumes are now practically double that of 2012.
Put simply, its good news for property investors and things are looking rosy for 2015. In this latest investment insight, I look at the individual sectors, where the money is coming from and what challenges investors face.
Regional markets will be the top performer this year and a substantial weight of money is now looking to the UK regions for opportunities that are outperforming London and the South East.
Research from JLL shows that investment activity in the “Big Six” regions in 2014 was up 80% on the previous year and that hunger remains for 2014. That investor appetite is being fuelled by strong take-up rates and active demand currently stands at 4.2 million sq ft.
The result of that is that we are now seeing prime rental growth in all of the major regional markets and speculative development is returning.
However, the continuing demand for space means that the Grade A shortage is intensifying and vacancy rates are now just 1.6%.
What that means for property investors is that good quality, well-located secondary stock is a great option and can deliver great returns. It will mean a slightly greater risk, but the right property will still attract solid tenants.
Overseas investors continue to dominate and account for half of all money being put into property in the UK. The USA and China dominate, accounting for 15% of all investment. Investment from America has more than doubled and Asian money is increasing at a significant rate.
The big story of 2014 was the return on the institutional investors. In 2014 these funds increased their spend on property by more than 30% year on year, further reflecting the growing confidence in the sector.
For property investors, the sheer weight of money in the market means growing competition for quality office and industrial space. Again that will help to fuel growth in the secondary market and further speculative development, but could also herald the return of the patchy retail sector?
Retail remains disappointing, although there are still some great opportunities and Rougemont has just completed a retail investment that is delivering fantastic returns.
Research from Knight Frank shows retail has continued to underperform office and industrial, but argues that it is growing and presents some good opportunities.
The recession is now pretty much forgotten by the public and people are spending again. The economy looks set to continue growing and wage rises are finally materialising. All this makes for a positive outlook for retail.
For investors, this means they can be optimistic about retail but they must also be very careful of the remaining areas where recovery will be unlikely. The right retail investment is all about location – look for city centres and out-of-town parks in major regional centres – and convenience – look for car parking, food, drink and leisure.
Looking ahead and the General Election will be worrying some – especially as the threat of a double election continues to grow with no clear winner. However, as I’ve said before, property is a safe haven in times of political instability and will see little impact.
Offices and industrial remain a safe, albeit challenging, investment option. Both are seeing strong take-up and rental growth and are also seeing the return of speculative development – further evidence of a healthy outlook. However, that means investors have to work much harder to find quality assets.
In retail, it remains challenging but there are good quality options for the careful investor who seeks out prime locations. For the foolhardy, there are still retail ghost towns which will offer little in the way of returns. Be careful and seek expert advice if you are considering retail.
Overall, property in 2015 will at least match the figures seen in 2014 and that is good news for investors. Now, if we can just get past the political merry-go-round…
The official results are in and 2014 saw the second highest investment volumes in history. Total UK investment hit £59.3bn and that figure was driven by volume of sales rather than huge single deals. And, the good news is, that momentum from 2014 appears to be continuing into 2015.
Commercial property investors can continue to be bold in 2015, but they must also be aware that risk is growing and there is also £28bn of cash looking for a home, so competition will be fierce.
In this latest Investment Insight, I look at where you could consider investing your cash and also consider what impact political instability, devolved powers and the pension reforms could have on the property investment market.
The current commercial property investment picture remains relatively unchanged from the end of 2014.
We are seeing increasing occupier appetite driven by solid GDP growth and that means investor demand is also soaring. The result is that demand is currently outstripping supply and that is putting downward pressure on yields.
The office and industrial sectors have both seen the return of speculative development, such is the confidence in occupier and investor appetite, and the retail sector is also performing strongly. Investors are positive about well-let and well-configured shops, particularly in shopping centres, and even the secondary retail stock is beginning to attract the more risk averse and yield-hungry investors.
However, with this increasing demand coupled with limited supply, investors are having to take on more risk to secure the returns they seek.
I’ve already talked about the UK General Election in previous blogs, but investment is a global game and many will be concerned about the outcome of “the closest election since 1945” and a catalogue of crises across the EU.
With tensions rising in the Ukraine, fractured relationships over EU policies and the Greeks now pretending the cheque they wrote for the Euro bailout loan has been lost in the post, it’s difficult to predict how economies will react.
In addition to the poll here in the UK, elections are also due to be held in Spain, Portugal, Poland, Denmark, Finland and Turkey. What this all means is that politics will be at the forefront of everyone’s mind during 2015 and it is impossible to say how it will all play out.
However, we can draw on the lessons of history. I’ve played down the potential of any significant impact on the investment market from political upheaval and Savills research team has agreed with me in their latest report.
The report says that while global instability may have a small impact on UK investors, the effect of the General Election will be “negligible”. Researchers show that during previous elections, the markets remain largely unaffected and follow the prevailing market conditions.
Looking across Europe, while the markets could be volatile, we will still see low interest rates, growing occupier demand due to lower oil and commodity prices, a lower euro and stronger spending power which will all be attractive to investors. The only potential threat on the horizon could be Quantative Easing in Europe which could have a slowing effect here in the UK.
The other two interesting factors for 2015 are the pension reforms that come into force in April and the continuing devolution of power to the UK regions.
In April, savers will be able to draw down lump sums from their pension savings and then invest it where they want. Inevitably, some of that cash will be ploughed directly into property or into funds that invest into property.
This new pile of cash will further increase competition and will force investors to move up the risk curve. It will be interesting to see how much pension money will turn to property and for many savers, syndicated property investment funds like ours will be an attractive option as it will offer them the chance to spread the risk while also securing above average returns.
At the end of last year, Manchester was given new powers over transport, planning, housing and skills. Most importantly, it was given much more freedom to decide on how best to spend its cash. This heralds the dawn of a new era of the UK regions securing devolved powers from central Government.
With the divide between London and the regions growing, any new government will have to continue this trend of devolved powers.
We already know that the regions have become much more attractive to property investors and the new powers present a major opportunity to investors. With money being spent on delivering growth through infrastructure, skills and new development, there will be a wealth of lucrative opportunities and investors need to watch this evolution of our regional centres with interest.
Put simply, 2015 will continue to be another good year for investors. We won’t see the same level of opportunities as we did last year, but investors can still have confidence.
In the months ahead it will be about taking more risk, albeit carefully calculated, but there will still be some great opportunities for savvy investors and we don’t really need to worry about the impact of the forthcoming election.
But, don’t take my word for it. Chief Executive of Lambert Smith Hampton, Ezra Nahome, says it best in his latest investment report: “Investors will move up the risk curve to make the most of secondary opportunities, and those with in-depth market knowledge are going to be in the strongest position to capitalise.”
In April of this year savers over the age of 55 will be given much greater freedom with the money they have poured into their pension funds for retirement. In a major pension reform unveiled by Chancellor George Osborne, savers will now be able to take a number of smaller lump sums from their pension fund and 25% will be tax free.
The move is all part of a drive by the Government to make people take more responsibility for their future finances and enable savers to seek far better returns than the paltry sums seen in recent years.
Savers have always had the option of taking 25% of their pension in a tax-free lump sum, but were then generally corralled into buying an annuity. However, under the new system, savers can now cash in smaller amounts and then make their own decisions on how best to invest their cash.
But, how should you invest that £50,000 from your pension fund? What will deliver the best return on a lump sum from a pension? What will £50,000 get you in today’s market? And, now you have it, where is your pension fund money safest?
To help you make an informed choice, I’ve provided some examples of what £50,000 in today’s market will get you and what you can expect in return.
1. Use your pension money to buy your dream car
For many, a £50,000 windfall from the pension reform will be an opportunity to snap up the car they’ve always fantasised about owning. Tearing across the countryside with the hood down and gathering admiring glances is always going to be a temptation, but it does come with some drawbacks.
If you’re looking for something new, £50,000 could buy you a sporty Porsche Cayman or Jaguar XF. While they may fulfil your desires and provide reliability, bear in mind many of these cars will be worth £20,000 less in just three years – assuming you don’t put it through a neighbour’s hedge the first time you put your foot down.
Many will say a classic car is a far safer bet and £50,000 opens up a world of possibilities for those demanding vintage style. At the minute, classic cars are soaring in value and could provide an attractive investment option. However, appetites change and you don’t have to look much into the past to see plummeting values in the classics sector. Classic cars also cost considerable amounts to maintain and could prove to be a major drain on day-to-day finances.
2. Spend the pension lump sum on designer fashion or jewellery
Fashion and retail labels constantly provide us with something to aspire to and £50,000 will ensure even the most well-dressed will glance over with envy as you adorn yourself with some of the most desirable items on the planet.
A stroll down any of the world’s most exclusive High Streets and shopping malls will quickly provide a wealth of options for spending a lump sum from your pension with shoes, handbags and jewellery all capable of demanding colossal price tags.
For example, the Leiber Precious Rose handbag features 1,000 diamonds and hundreds of other valuable stones and will cost you a little over £50,000. Similarly, visit a store like Asprey and you could spend £50,000 on a solid silver safe in the shape of a Gorilla.
The one drawback is that if you want to protect your investment, you can’t wear or use any of these exclusive items and nothing falls out of fashion faster than fashion itself.
3. Use the pension reform to fund your hobby
Everyone has a favourite pastime and all of them cost money. In the UK, golf and cycling are among the most popular and both can easily help you to spend your pension fund.
In golf, £50,000 will get you a year’s membership at arguably the best course in the world, the Liberty National in New Jersey, USA, or a set of Honma Golf Five Star clubs – granted you do get a bag and some accessories in that price. Obviously a year’s membership is short-lived and the first duff shot on the tee will soon destroy the value of your clubs, especially when they are subsequently wrapped around a tree or dumped in the lake by the club house.
Cycling can also quickly escalate. The Aston Martin One-77 cycle costs £30,000 and can be accessorised with an exclusive range of Gucci cycling products. A quick and painful trip to the tarmac will again put a serious dint in any future value.
4. Romance…
Follow the example of a young Chinese programmer who spent £50,000 on 99 iPhones on Singles Day in the country and then arranged them in a heart before proposing to his girlfriend. It was a massive romantic gesture, especially considering he earns just £25,000 a year, and she said NO.
While romantic gestures may provide much needed investment for the soul, it rarely provides a monetary return. Opt for some roses and invest the rest of your money elsewhere.
5. Invest your pension fund in syndicated property
Property has long been a safe bet for investors and people taking advantage of smaller lump sums under the new pension reform will undoubtedly consider property as an investment.
Syndicated property is a valuable vehicle for enabling smaller investors to get a stake in larger properties that can offer higher returns, secured against the strength of the tenant and the bricks and mortar. By choosing this option, investors get income from quarterly returns while also seeing the value of the property potentially grow.
There’s more confidence back in the property market and tenants are beginning to commit to longer leases. We are also seeing a growing appetite among high net wealth individuals for this type of investment.
With this type of investment there is a huge difference between the return on a Government gilt, which is typically 2.5-3 per cent. Commercial property is delivering average returns of around 6-7 per cent and Rougemont Estates is delivering better returns than that.
Minimising property investment risk
Risk in this sort of investment is minimised by buying properties in prime locations that offer strong prospects for growth through lease renegotiation or property conversion.
Investors, like us, need to look to buy bullet-proof assets. These are properties with quality tenants, solid lease agreements and great future potential.
Syndicated property investment still offers a good, long term, predicted income stream above market level. While many are still wary of syndicated commercial property investment, for the right investor, this is a sector that can deliver solid returns and rising confidence in the market means the opportunities are continuing to grow.
If you do decide to invest in property on your own, consider how to manage it, and you could even consider creating your own syndicate with family or friends. With both of these options, feel free to speak to us about how we can provide help or support.
While many are concerned about how people will spend the lump sums from the pension reform, this new legislation will present significant opportunities for investors. While many of the suggestions here are a little tongue-in-cheek, savers who do their research and find investment opportunities that are relatively risk free will see far better returns than their current arrangement.
If you have any further suggestions for investment opportunities, I’d love to hear them in the comments below.
This week I attended DTZ’s 2015 Outlook seminar which looked at commercial property investment in the UK and across the globe. The presentation revealed that UK commercial property investment reached an all-time high in 2014, with £54.9 billion transacted, with the increase driven by investment outside of London, which increased from £25.4bn in 2013 to £34.4bn in 2014.
The big question at the event was whether 2014 was a year to be bold for investors and the general consensus was ‘yes’. More importantly, it also asked “Should investors put money into commercial property in 2015?”. Again, the answer was that commercial property investors can be bold in 2015.
Investors will have to look to the secondary sector
The comprehensive research from DTZ found that £28bn of cash is currently looking for a home in commercial property investment, including the institutional funds I’ve mentioned in earlier blogs.
However, Ben Clarke, Head of UK Research at DTZ, also said that prime property yields will stagnate in 2015 across the regions and have already stabilised in London. What that means is that growth will have to come from the secondary sector.
For example, investors will now have to consider investment properties where quality tenants have short leases that will have to be renegotiated in the next few years. However, rental growth and burgeoning occupier confidence means that investors can also be more confident.
These key factors ensure that landlords no longer have to offer soft deals to keep their tenants. Even if you are unable to renegotiate a deal, occupier demand is such that finding a new tenant is less of a challenge in this improved market. Plus, the DTZ research shows incentives like rent free periods have also been slashed by one third.
The regions remain attractive for commercial property investors
Unsurprisingly, the research showed that the regions would continue to be hugely popular with investors. Increasing demand and limited supplies means the regions continue to offer higher yields than London.
Domestic retail funds dramatically increased their interest in the regions during 2014 and, while overseas investment continued to dominate London, representing 68% of transactions, the big increase in foreign cash was in the regions. The overseas share of the market increased from 28% in 2013 to 36% in 2014, driven primarily by investment from the US, China and Europe.
What this means is increased competition and, as a result, prices in the region will become keener while yields are compressed.
What are the risks for commercial property investors?
At the event we heard that total property returns in 2014 were 20%. While that figure won’t be as high in 2015, it will still be double-digit returns.
On the face of it, it’s all good news but there are a few isolated risks to consider. The ultra-low interest rate environment coupled with the weight of money in the market and the lack of stock could over-inflate prices and that could be counter-productive to the market.
The question is whether rental growth will catch up in time for when the money is spent? Growth will not be as fast as in 2014, but I believe we’ll continue to see a gradual increase going forward and that will be ideal for the market. Ultimately, the opportunities continue to outweigh the risks.
Interestingly, the research found that bank exposure to commercial property is down 35%. While this figure may raise a few eyebrows, it is misleading. The banks are still lending and are more aggressive, but there is still a lot of cash out there and that is being spent first – which is sensible.
What does this mean for syndicated commercial property investors?
From our perspective, what this means is that we will have to work harder to find quality assets for our syndicated property investors.
The good news is that investors can take more confidence in secondary rental growth and that makes the secondary market more attractive and worth the increased risk, a view shared at the presentation by Greg Davison, Investment Director at DTZ in Leeds. Put simply, if existing tenants don’t renew there will be others ready to sign up.
We will still be able to deliver double-digit returns in 2015 and we will still see solid capital growth as the market continues to grow.
One example of this is the Whisky Maturation Warehouse our clients purchased a year ago. Investors in that syndicate have enjoyed 8.75% per annum return and the latest valuation has shown that the warehouse has increased in value by 8-10% over the past 12 months.
If you have any further thoughts on what lies ahead for 2015, please share them in the comments below.
We can predict a lot about 2015 with certainty. There will be another Royal baby, the UK political merry-go-round will hit full spin in the run-up to the General Election and Top Gear’s Jeremy Clarkson will court further controversy.
However, developments like pension reform, continuing uncertainty and deflation in the eurozone, the potential for interest rate rises and the weight of cash pouring out of the institutional funds can make investment predictions a daunting prospect for some.
In reality, 2015 will follow a similar path to 2014 for those considering commercial property investment. It will be a year of growing occupier demand that will help to fuel rental growth and increasing investor appetite. The one difference will be that the dwindling lack of supply will increase competition for quality assets and that means many investors will have to increase their appetite for risk to secure the returns they seek.
In this Investment Insight, I aim to give an overview of what we can expect from the year ahead and share some of the views from experts across the sector. In the weeks to come, we’ll also be discussing these issues in more details through further blogs.
Will the General Election affect the commercial property investment market?
![Image courtesy of [David Castillo Dominici] at FreeDigitalPhotos.net](http://www.rougemontestates.co.uk/wp-content/uploads/2015/01/ballot-box-300x225.jpg)
Image courtesy of [David Castillo Dominici] at FreeDigitalPhotos.net
Unlike more liquid assets, property is not as quickly affected by political swings and that means it can be a safe haven while Prime Minister David Cameron aims to hold off the advances of Labour’s Ed Miliband UKIP’s Nigel Farage and secure a second term.
The potential issues are the risk that some occupiers may hold off on decisions until after the election and overseas investors may be put off by the prospect of an EU referendum if the Tories hang on to power.
This is a view shared by Caroline Simmons, the head of investment at UBS, who says the election will be a risk, but appetite remains strong.
Even if we see a massive shift in Government and political policy, the impact on the property investment market could take years to crystallise.
How will the faltering eurozone affect the UK economy?
We are already seeing signs of deflation in the eurozone – the European Central Bank revealed that December saw a minus 0.2 per cent dip – and this could have a significant impact on the UK.
The knock on effect of this can cripple economies as it makes debts harder to service, causes falling prices and it can also lead to business and households putting off investment and spending, which hits corporate profits and costs jobs.
Several people are predicting that inflation could remain negative in the Eurozone until later in the year and that causes people to hold off on spending, thinking things will get cheaper as a result. In reality, it will most likely lead to Quantative Easing in Europe and that could have a devastating impact on inflation targets in the UK.
Inevitably, that would force the Bank of England to take further action to prevent our strong growth from stalling. From an investor point of view, this could have a slowing effect on property and yields and it’s something everybody should be aware of.
Where will investors be spending their money?
The London investment market is cooling off as all of the quality assets have now been snapped up and that means most investors are now looking to the regions.
The biggest issue is a lack of prime stock. Speculative development has now returned, albeit largely in the distribution and city centre office sectors where there is limited supply for occupiers, and, in any event, investors will have to wait another 18 months for these new opportunities to materialise.
The institutional funds are also under great pressure to spend the mountains of cash at their disposal and that means they – along with overseas investors and other major funds – are having to increase their risk profile, consider secondary stock and look at new locations.
This move down the food chain means there is increasing competition for quality assets and investors will have to work harder to find the right investment. Rougemont Estates specialises in finding these “pockets of value” and we are currently finalising a deal to invest in a long-leased prime retail investment asset that has a captive market and a queue of retailers requiring a presence on the same high street.
Historically, we wouldn’t typically consider retail investments however, having seen the beginnings of the return of the ”High Street” after seven years of devastation, rationalisation and change, it is encouraging to see this discounted investment sector rejuvenating itself.
However, out of town retail remains a concern due to the “online shopping” factor. Likewise secondary retail continues to suffer as the “High Street” has fundamentally changed and contracted leaving essentially prime only.
In general, there is still a significant lack of quality stock and whilst care must be taken, we are still confident about the year ahead. We continue to see opportunities and are working alongside occupiers to maximise their occupational requirements whilst also engineering quality investment opportunities both for syndication and individuals.
Where will money from the pension reform be spent?
Key considerations for the year ahead include the anticipated interest rate rise later in the year, the potential of a new mansion tax and the increased stamp duty. All of these could impact on certain sectors of the property world and that will inevitably have some impact on investment opportunities.
However, perhaps the biggest impact will be from the new pension reforms that allow people to take their cash and invest it where they want. Many will look to invest in property and this new weight of cash, while increasing competition, will also add to the strength of commercial property investment syndicates.
While many may opt for the “bank of mum and dad” option and help their children onto the property ladder, many will be looking to improve the returns on their cash by investing in a range of syndicated commercial property investments.
What is the outlook for 2015?
In 2014, we bounced back. Occupier demand grew, rents began to increase and investment across the UK topped £50bn.
It will be the same story in 2015. The weight of money will continue to drive the sector ahead and, although the total amount of investment will probably be down due to the lack of supply, it will be another solid year with some great opportunities for securing decent returns.
Investor appetite will remain strong as, even with an interest rate hike, returns from property will continue to far outstrip bond yields for the foreseeable future.
As always, this information does not constitute investment advice and the views expressed are purely those of the Directors of Rougemont Estates. These regular updates aim to help you develop your own strategy for investment by sharing clear independent research on what you can expect from the commercial property market in the months ahead.
If you have any thoughts on what lies ahead, I’d love to hear them in the comments below.
Welcome to the first Investment Insight from Rougemont Estates. Through these updates we aim to provide an overview of the property investment market, pulling together data and research from a range of leading organisations and sharing our insights. Please note that this information collated and illustrated does not constitute investment advice and the views expressed are purely those of the Directors of Rougemont Estates.
These regular updates aim to help you develop your own strategy for investment and will deliver clear independent research on what you can expect from the commercial property market in the months ahead.
Throughout this Insight document we have provide URL links to the source of our commentary.
Investor appetite growing
Our first look at the commercial property investment market is all good news. This year has been about recovery from a long and painful recession and investors have flooded back into the market, looking to cash in on quality assets that deliver substantial yields.
Knight Frank’s latest market update shows the total investment volume for 2014 hit £3.1bn by the end of Q3 – the highest total for six years. That insatiable investor appetite is being fuelled by a strengthening economy and a strong outlook that is helping to boost the optimism of business leaders across the country.
The huge pool of capital from overseas investors and major funds here in the UK shows no signs of subsiding and the only thing holding back the avalanche of cash is the dwindling supply of quality stock.
2014 has seen all of these funds looking to the regions for quality deals and that, coupled with businesses returning to expansion mode, is delivering strong rental growth and the tightening of occupier rental incentives – all good news for existing landlords.
Property yields are stable
Dwindling supply has seen yields continuing to fall over the summer and hence prices rise. Cushman and Wakefield’s latest research shows that prime is down 7bp to 5.1% and secondary is down 17bp to 7.8%. However, gilt yields have also fallen in the past quarter meaning property’s advantage over bonds has edged up once more, ensuring commercial property investment continues to be one of the most attractive options for investors.
Savills research shows that yields are stable, meaning we are close to the bottom of the yield cycle, and yields will remain close to the historic lows into 2015. The same research shows that the all property return for 2015 will be 12%.
Couple this with the recent volatility in the equity markets, it is understandable that property continues to be a realistic and popular choice for investors.
Alternative investments
The appetite for quality stock has once again started to see the return of speculative development in almost every region of the UK, but the majority of these new developments will take two years to complete. What that means is investors are now turning to secondary markets or alternative property investments like healthcare, hotels and renewables.
JLL’s alternative property survey revealed that 90% of investors are planning to increase their exposure to alternative property sectors, while 9% will increase their allocation for alternative investments from 23% to 32% over the next five years.
What this means is investors will have to work harder to find solid returns and many are looking to the regions where they hope to find well-located stock with the potential for active asset management.
At Rougemont we minimise risk by buying properties in prime locations that benefit from long leases or offer strong prospects for lease renegotiation, rental growth or conversion to an alternative use. This strategy continues to deliver average annual income returns of 6.5-7 per cent, plus all the potential for capital growth. In 2015 we feel there will still be areas of opportunity within the prime and secondary market where our clients will be able to benefit from acquiring quality assets that present real opportunity. However, due to an increase in competition clients may have to become more realistic on their annual return expectation in order to capitalise on secure medium term growth prospects.
Rental growth will continue
Looking ahead into 2015 we believe it will be more of the same. We will continue to see growing occupier demand and that will fuel further investment demand. Rents will continue to grow throughout the year – Savills predicts five years of rental growth. This will no doubt see an increase in investors risk profiles and we are already seeing acquisitions being undertaken that factor in considerable hope value.
While vendors may be getting a little ahead of reality in terms of pricing, the pricing in the regions should stay stable for the next six months. However, opportunities will still continue to emerge from the distressed banking sector as values improve and bank managers become increasingly under pressure to return the default loans they have been managing over the last 5 years.
Perhaps the biggest question mark for 2015 will be the General Election, but I believe it will have little impact on the commercial property investment market.
The recent Scottish Referendum failed to derail the market and, historically, elections have had little impact on investor appetite. Indeed, the stable nature of British politics has long been a draw for overseas investors.
While the liquidity of direct property ownership can sometimes be seen as a drawback, it can also be a strength. Unlike other liquid assets, property does not react quickly to opinion polls or political instability and, because our major political parties are so similar, the election will have little impact, regardless of the outcome.
Overall, competition will continue to be fierce in 2015 and I also expect to see the Institutional Funds playing a bigger role next year as investors deploy further funds in property.. The outlook is good for existing landlords and likely to be competitive for new investors but opportunities will present themselves.
After adding £10m of new acquisitions in the first half of 2014, taking the Rougemont Estates portfolio to £40m, managing director James Craven talks about finding “pockets of value” for investors in the syndicated commercial property market.
The commercial property market is once again thriving and we are seeing big increases in occupier demand alongside a renewed appetite and rising confidence among developers. This is also resulting in renewed interest among both domestic and international investors who are looking to cash in on the resurgence of the commercial property market following the pressures of the economic downturn.
For high-net worth individuals looking for solid investments in commercial property this can cause significant challenges, but there are still some pockets of value around the country. As the market has recovered over the past year, we have still been able to find investment properties that continue to deliver income returns way above the norm.
Commercial Property Investment
This year our investments have included a £6.5m whisky maturation warehouse in Edinburgh and a £1.5m property in the heart of York. We’re also currently closing a £6.6m deal for a prime retail unit in St Helier, Jersey.
The whisky warehouse, near to Edinburgh Airport, is backed by drinks giant Diageo on a 15-year lease. The whisky market has grown 80 per cent in the past decade and the warehouse has scheduled increases in rent, delivering an 8.75% per annum return that is paid to investors quarterly.
Stamford House in York is home to the law firm Lupton Fawcett Denison Till. The property delivers a 10 per cent per annum return and has great potential for future growth.
We moved quickly on these deals because of the potential they offer our high-net worth investors and the next deal we’re chasing in Jersey is another deal that will deliver similar returns. We wouldn’t typically consider retail investments as many UK High Streets remain fragile, however, Jersey is an island with one high street, a queue of retailers requiring a presence and a captive market. That all adds up to a solid investment.
Strong income returns
While it’s true there is fierce competition from major institutional funds, we are confident of buying more quality assets for investors and continuing to deliver income returns of up to eight per cent per annum – compared to the one per cent you can usually expect from the mainstream banks.
There’s more confidence back in the market and tenants are beginning to commit to longer leases. We are also seeing a growing appetite among high net wealth individuals for this type of investment.
With this type of investment there is a huge difference between the return on a Government gilt, which is typically 2.5-3 per cent. Commercial property is delivering average returns of around 6-7 per cent and we are doing better than that.
Minimising property investment risk
Risk in this sort of investment is minimised by buying properties in prime locations that offer strong prospects for growth through lease renegotiation or property conversion.
We aim to buy bullet-proof assets. There is still a significant lack of quality stock and you have to be careful, but we are still confident. We look to operate in a niche area, picking up properties that are too expensive for individual investors but that are too small for the big institutional funds.
The big funds are coming in with such an impetus that they are driving up prices by competing amongst themselves. We don’t wish to play on their ‘pitch’ and consequently have been finding value in alternative property assets such as the whisky maturation warehouse and the current Jersey offering.
Confidence in future of property
We are being careful and selective. Syndicated property investment still offers a good, long term, predicted income stream above market level. Interest rates will be slow to recover and we are way ahead of what the banks can offer.
While many are still wary of syndicated commercial property investment, for the right investor, this is a sector that can deliver solid returns and rising confidence in the market means the opportunities are continuing to grow.
We are confident about what lies ahead for commercial property and I’d welcome your thoughts on what you expect to see in the months ahead and whether you think investor confidence will continue to rise.