Our Winter newsletter is now published and available to download below.
This summarises the events of 2016 for investors and contacts and shares our views on where we see opportunity during 2017….
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.
Cushman and Wakefield’s latest Quarterly Marketbeat report paints a promising picture for UK commercial property investment and shows, as many suspected, that the market has continued to strengthen into 2015.
Healthy business and consumer confidence is delivering the fastest rising occupier demand in almost 20 years and that is applying upward pressure on rents across all sectors.
The biggest riser, unsurprisingly, was the office sector which saw rents soar by 6% over the year while industrial climbed 3.9% and retail 3.2%.
The overriding theme of the investment market is the continuing lack of available stock and that hasn’t been helped by people waiting to see the outcome of the recent General Election. However, the weight of demand and high prices being fueled by intense competition is motivating many to now consider selling.
Activity is also being boosted by the resurgence of the financing market, with banks and other financial institutions once again actively looking for opportunities to lend to across a range of sectors and markets.
Retail is perhaps the biggest surprise of 2015 so far. Prime high street assets in key market towns and major regional hubs have become a top target for UK funds and institutions and overseas private equity as they still offer good prospects for capital and rental growth.
Cushman and Wakefield’s research shows that the rising consumer confidence and solid occupational performances seen in recent months have dramatically improved investor appetite and, while the South East remains the most popular destination, key regional hubs like Birmingham, Leeds and Edinburgh are being considered in the hunt for solid capital and rental growth.
Shopping centre demand also remains high and we are now also seeing a lot of private equity buyers looking at the secondary market and the larger lots.
The top performer this year will be the office sector and that will be primarily driven by rental growth due to the lack of stock. Well-located and good quality secondary stock along with offices with redevelopment potential will see the strongest demand from investors.
In the regions, there is still room for further rental growth and yield compression due to strengthening fundamentals. Well-located and good quality property in the secondary market is also expected to remain attractive due to the potential for capital growth.
Another top target for investors in the office sector will be properties with potential for redevelopment or asset management opportunities in the areas of high occupier demand.
A lack of space will also be the driving factor in the industrial sector and investment appetite will remain strong. The growing demands of occupiers, with internet retailers at the front of that queue, will deliver strong rental growth. ,.
For investors, opportunities are starting to come through from landlords keen to sell assets acquired within the last 3- 5 years, where they can realise profit already. Many have also started speculative development, buoyed by growing demand from occupiers.
Perhaps one of the most interesting aspects in the report is the predictions for rental growth and average prime yields around the country for the next 10 years. It throws out some encouraging news for investors, but also has some surprises.
Looking across the UK and the regions in the north are in the best position for delivering rental growth. In the North, North West and Yorkshire and the Humber, investors can expect to see average rental growth of around 5% in retail over the next 10 years, 5.4% in the office market and 4.2% in industrial.
When considering average prime yields, the same three regions are strong performers again and have seen little in the way of compression over the past 12 months when compared to the rest of the country.
Perhaps most surprising though is that Cushman & Wakefield recently predicted that the South West will see little or no growth in each sector over the next ten years because the market has become so overinflated.
With increasing business confidence comes a growing appetite for commercial property investment. Businesses are investing, the economy is growing and that is translating to greater occupier demand.
Current affairs rarely have a big impact on property and, as we’ve predicted in earlier blogs, the recent UK General Election has had little impact. In fact, the small majority gained by the Conservative Party means we can expect a similar approach to the previous five years and that has bolstered investor confidence.
In this blog, I look at the overall investment picture and ask what’s in store for commercial property investors for the rest of 2015.
With political stability, more jobs, the UK briefly slipping into deflation and real term wage rises, we are seeing a rise in consumer spending and that is translating to further confidence in the economy.
Research shows occupier demand is rising at the fastest pace in 17 years and that is fueling rent growth – offices are up 6% year on year, industrial rents have grown 3.9% and retail is also up 3.2%.
Investment enquiries are also soaring. Overseas investors are pouring equity into the UK as a result of continuing overseas instability. The institutional funds and private equity investors have also moved heavily into commercial property again.
All property annual total returns have edged down to 17.9% – a 1% drop since the start of the year. This can be attributed to a smaller yield impact as capital value growth slows. However, while capital value growth has slowed, rents are rising fast – soaring to 3.6% in April, from 1.3% at the same time last year. This is the highest rental growth value since 2007.
In principal this is all still good news for the UK investment market. However, years of developer inactivity have taken their toll and supplies of quality stock are diminishing fast. The result is a big increase in competition and pricing.
While most overseas investors and funds had concentrated on London and the South East, the market has now become overheated and they are looking to the UK regions and secondary stock as they hunt for higher returns.
The big institutional funds are now everywhere and are arguably overpaying for everything as they bid to deploy capital and gain exposure.
The result of this is hardening yields. Cushman and Wakefield say the All Property average prime yield has now hardened by 9bps to 4.92% this year. The largest compression was seen in the office sector, while industrial yields were stable.
What this means is that investors may have to take more risk if they want to match the returns they have seen over the past five years.
Just a year ago, you could buy 10 year leases to quality tenants in grade A located buildings for 7%. This is now 6% 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 returns are struggling to look attractive as they are purely being driven by the lack of available investment stock.
Investors may 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% – 8%.
The greatest risk is always a tenant default, tenants not renewing their lease or having to agree to soft terms in order to maintain occupation. However, quality bricks and mortar will always mitigate against these risks.
As always, it’s important that investors are always looking at their exit. Many will consider keeping an asset as it’s still difficult to know where else to put your money. However, you have to take a profit while you can and then look at other opportunities. Too many investors were caught in the trap of holding assets when the recession hit. These assets have since performed poorly and investors have been forced to accept unfavourable terms to retain their tenants.
The investment landscape is evolving, but risk can be minimised by backing up every decision with data, research and analysis. Look at the yields in the area and for the sector, look at all the variables and then secure the right deal.
2015 will be a year of increased risk for investors, but they should draw confidence from the burgeoning economy and can look to a prosperous future in property.