The national law firm Nabarro have just published their latest UK Real Estate research which interviewed 271 property investment professionals who together are responsible for portfolios worth more than £400bn.
The research shares the insights and predictions of these investment experts and paints a buoyant picture for the real estate market in the years to come. In fact, the report itself is called “Riding the Wave” and suggests we are at the crest of the current cycle.
I’ve read through the report and share some of the most interesting things to emerge from it.
The research found that more than three-quarters of those polled (77%) are more optimistic about the real estate market compared to last year and just 3% are more pessimistic. The combination of low interest rates and current property investment yields are a heady mix for investors compared to rival investments like Government bonds.
Equally, fears about an imminent downturn in the market have greatly reduced. Last year, almost a fifth of those polled feared a downturn within the next two years. In this poll, just 3% are worried about the same.
However, when you look at the five-year predictions, 42% of those polled say the chances of a downturn are high. This isn’t surprising as the research demonstrates many believe we are half-way through the current cycle and a major correction at some point will be inevitable.
With interest rates set to rise steadily at some point soon, but still remain at a historically low level, we will undoubtedly see a further correction in the property market, but this could well be felt by way of another stagnant period as a number of factors take hold.
These factors include the impact of a rate rise on those who continue to be burdened with high levels of debt. This could provide opportunities, however, business confidence is strong and any gradual increase in rates could be circumnavigated by improving occupier levels and an increase in rental growth.
The occupier market may improve investment stock availability as developers gain confidence, but this will take time and, at present, there seems sufficient investment demand to outstrip supply for a number of years.
The market is therefore likely to remain stable and supported by a growing occupier market and investor appetite. Adjoining these two factors is the global desire to invest in UK real estate which is seen as a “safe haven” while some European and Asian markets remain unstable.
Too much demand, not enough supply and a slow production line = slow and stagnant, but a stable service
Unsurprisingly, offices still remain the number one asset choice for investors but there has been a major shift in the popularity of alternative investments. The big mover has been residential property which is now the second most desirable asset for investors.
Rougemont has recently invested in a residential opportunity in Helmsley, North Yorkshire where much of the appeal is being fueled by the growing lack of supply of houses and a unique location. Most agree that the UK needs to build around 200,000 new homes a year to meet demand and we’re not even delivering half of that.
While industrial and retail remain attractive, other big movers include distribution and logistics due to the rise in e-commerce and other alternative investments like healthcare and student housing.
The Conservative’s securing a majority at the last General Election has been widely welcomed across the investment sector, but the prospect of Britain leaving the EU following a promised referendum is seen as a major threat to the stability of the market.
Two-thirds of those polled said an EU exit would be bad, saying it would cause significant disruption in the short-term and would send a poor signal to international occupiers in the longer-term. Crucially, many are sceptical that Britain will leave the EU and few are delaying investment decisions as a result.
In reality, the impact of an exit from the EU is extremely difficult to predict but my feeling is that this referendum will be used as a tool for Prime Minister David Cameron to renegotiate a better deal for Britain and that property will largely remain unaffected.
Another key concern was a rise in interest rates as many property companies and developers are still heavily in debt. Surprisingly, few were concerned about a Greek exit from the EU, with just 1% saying it could destabilise the UK market.
The proposed Northern Powerhouse initiative – a plan to give more powers to Northern England to speed up infrastructure and development work – has been warmly welcomed across the real estate sector.
The north is seen as a land of opportunity for developers, investors and occupiers alike and I’ve written at length about the growing popularity of the regions in our blogs. As a result, a resounding 84% of those in the poll supported the Northern Powerhouse plans.
By strengthening links across the Pennines and from Liverpool up to Newcastle, developers believe the north can demonstrate real strength and vision and that will only help to improve investment prospects.
With increasing commitments like HS2, the Northern Rail Hub and the Northern Powerhouse, Manchester has topped the list for the most appealing investment prospect. Climbing in popularity again, Manchester was named by 79% of those in the poll and was closely followed by Birmingham, Bristol and Leeds.
What’s also interesting is the fall in popularity of Scottish cities. The recent referendum and the rise of the SNP has shaken investor confidence, with many worried about land reform proposals and changes to the political and legal framework.
The top six “cities or towns to watch” were Cambridge, Reading, Liverpool, Newcastle, Oxford and Sheffield. Each of these has the “golden triangle” of ingredients – solid commuter connections, a strong and growing economy and excellent quality of life – and it’s what investors looking to the regions should be looking for.
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.
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.
Having sold a stake in his successful property firm Instant Offices, Rob Hamilton, who is also co-founder of rapidly-growing cycling tour business Ride25, turned to Rougemont Estates to find a safe haven for his cash. Here, he shares his thoughts on why he opted for syndicated property investment.
Investors face two burning questions when it comes to finding a haven for their cash. Where can investors get a decent return? And, where will my investment money be safe? It’s a question I faced when I sold a stake in my Instant Offices business two years ago and, already having a solid understanding of the property market, I decided property investment would be the best option.
As a business leader I’m used to taking risks, but I wanted a low-risk option that would provide a safety net for my family but would also deliver decent returns. I know the UK commercial property market can return decent yields but was wary about investing in London where the steep rises are often followed by big dips.
As anyone involved in property in the south will know, the London office market can often prove volatile so I turned to Rougemont Estates to draw on their knowledge of the intricacies of the entire UK commercial property market.
As a specialist commercial property investment company, Rougemont buys high value properties around the UK regions which have secure, sustainable long term commercial tenancies in prime affluent cities and town centres and syndicates the investment to high net worth individuals, with a minimum investment of £25,000. Commonly properties have major national and international corporations or financial institutions on 20 year plus tenancies.
Rougemont typically targets key locations such as Leeds, Sheffield, Manchester, Bristol or York and properties include the HBOS northern regional office in Sheffield and an English Heritage Grade II listed office in York.
It was this expert knowledge and thorough research that attracted my interest. As James Craven has said in this blog, Rougemont works hard to find the “pockets of value” around the UK and also makes sure any investment has great future potential.
These “pockets of value” are attractive properties in their own right, and have the added value of existing good quality long term tenancies, but they also have alternative use prospects in a worst-case scenario.
You can get a better long term return outside of London, but the challenge for someone like me is how to find and buy these properties when you don’t know about locations and what is a good buy.
I think regional investments at the moment are relatively safe with a guaranteed, decent yield. The Rougemont properties yielded 7 per cent per annum, had no debt so your risk is very low and we can sit tight for the long term, selling when it’s right for the market. I like the fact that you aren’t putting money into a fund but can actually pick and choose which assets you invest in. You feel more in control.
My investment philosophy is to be as diverse as possible – not just between equities, funds and properties, but also geographically and by types of property. So far I’ve invested in three properties and I’m still looking for other similar opportunities with Rougemont.
Provided you can invest in properties long term – at least five or ten years – then you can ride out any dips in capital values and minimise your risk. After the recent turmoil in the property and financial sector investors quite rightly are demanding a high degree of security. Rougemont are not afraid of scrutiny.
All of this adds up to a solid investment prospect for me and that’s why I’ve opted for syndicated property investment. If you’ve got any further thoughts or questions about this sort of investment, please share them in the comments below.