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.
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.
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.
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 fast-approaching pension reforms which will allow people to draw cash from their pension fund and spend it how they see fit are causing some concerns. Many fear people will take advantage of these new regulations and tax incentives to draw down billions of pounds from poor-performing pensions and then spend that cash unwisely.
Deciding how best to invest your pension money can be a minefield, but many will be looking to put that money into property.
Property is performing well and we have seen unprecedented amounts of cash invested in commercial property over the past 12 months because of huge double-digit annual returns. The residential property market is seeing decent growth and that will also be attractive to savers who are being held back by meagre interest rates with no prospect of increase.
However, individual property investment does have one major drawback. It can be very difficult to unlock that cash when you need it the most and, if you don’t have the experience and insights needed for property investment, it can be a lottery.
Alternatively, syndicated property investment can be a sound bet for people looking to invest their pension elsewhere. Not only does it give you access to a wider pool of properties, but the choice of which property to invest in is entirely yours rather than handing control of your investment to a discretionary property manager. Each purchase is thorough researched with all the necessary due diligence being made available for investors to review and form their own opinion. Here I’ve listed five reasons why you should consider investing your pension in a syndicated property fund.
1. Spreading the risk of your pension investment
By joining a syndicate you can invest your money in multiple properties, which helps to spread any potential risk of tenant default which is one of the main risks with any commercial property investment. The minimum investment is £25,000 and that means you can choose to invest your pension cash in a wide variety of different properties. There is no maximum, but typically people invest around £150,000.
As an added bonus, each property is independently managed, valued and the legal title to the property should also be held in the name of an independent Professional Custodian Trustee, ensuring that the property is protected even if the investment manager ceases to exist.
2. You can sell or transfer your share in the property at any time
With individual property investment, your pension money will be tied up in the property until you can sell it. At best, that means a two month wait for your money should you need it. In reality, you will probably have to wait at least a year to sell the property and get your pension fund cash back.
With syndicated property, an investor can sell at any point and the syndicate as a whole can also decide to sell the property with a 75 per cent majority vote.
Typically, in our case, a holding is sold to another syndicate member or another member of Rougemont’s qualifying High Net Worth client base.
Ideally, syndicated property is a five-year investment, but should you wish to sell, a typical syndicate sale takes just three weeks and Rougemont as the operator of each syndicated property is authorised to assist with this role.
3. Average annual returns of 6-7 per cent on your pension money
With interest rates having been anchored at 0.5 per cent for years and the threat of a further cut now on the cards, savers have been heavily punished during the recession. As a result, most are now looking to take control and find the best returns they can for their pension fund.
Syndicated property investment delivers average returns of around 6-7 per cent and Rougemont Estates is delivering better returns than that.
Each investor receives a quarterly income from the property and also benefits from any potential growth in value of the building.
Total returns on commercial property last year hit 19 per cent and, while it’s unlikely to be as high again this year, investors will still be able to expect double-digit returns when factoring in both income and capital growth, providing they invest in the right property.
4. Syndicated property returns are tax free and offer long-term growth for pension savers
Around half of all investors in syndicated property are using cash from their pension funds as any income or capital gain from the property into their pension is tax free, which is obviously a real benefit.
A typical investor is 45-years-old and is seeking a secure, long-term income that offers the prospect of medium to long-term capital growth. Depending on their age and profile, we find most investors simply don’t want the hassle of playing the equity market every day or having ownership of a single property where all their ‘eggs are in one basket’ and they have to actively manage the property.
5. Pension investors get expert insight and guidance
Perhaps the biggest benefit of investing your pension money in a syndicated property investment is the knowledge that you are getting expert advice and quality investment prospects.
Rougemont Estates minimises risk in this sort of investment by drawing on their years of knowledge and buys properties in prime locations that offer strong prospects for growth through lease renegotiation or property conversion. Rougemont offer the opportunity to it’s High Net Worth audience by way of a detailed investment prospectus. The decision of whether to invest is then up to each investor. Rougemont does not have discretion on any investors funds.
We aim to buy bullet-proof assets. There is still a significant lack of quality stock out there and investors have to be careful.
However, we are 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.
By turning to a syndicated property investment company, you can invest in properties in prime locations that benefit from long leases or offer strong prospects for lease renegotiation, rental growth or conversion to an alternative use.
For pension savers, we feel there are some real areas of opportunity within the prime and secondary market where they will be able to benefit from acquiring quality assets that present a real opportunity for growing their cash for the future.
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.