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.”
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.
After adding £10m of new acquisitions in the first half of 2014, taking the Rougemont Estates portfolio to £40m, managing director James Craven talks about finding “pockets of value” for investors in the syndicated commercial property market.
The commercial property market is once again thriving and we are seeing big increases in occupier demand alongside a renewed appetite and rising confidence among developers. This is also resulting in renewed interest among both domestic and international investors who are looking to cash in on the resurgence of the commercial property market following the pressures of the economic downturn.
For high-net worth individuals looking for solid investments in commercial property this can cause significant challenges, but there are still some pockets of value around the country. As the market has recovered over the past year, we have still been able to find investment properties that continue to deliver income returns way above the norm.
Commercial Property Investment
This year our investments have included a £6.5m whisky maturation warehouse in Edinburgh and a £1.5m property in the heart of York. We’re also currently closing a £6.6m deal for a prime retail unit in St Helier, Jersey.
The whisky warehouse, near to Edinburgh Airport, is backed by drinks giant Diageo on a 15-year lease. The whisky market has grown 80 per cent in the past decade and the warehouse has scheduled increases in rent, delivering an 8.75% per annum return that is paid to investors quarterly.
Stamford House in York is home to the law firm Lupton Fawcett Denison Till. The property delivers a 10 per cent per annum return and has great potential for future growth.
We moved quickly on these deals because of the potential they offer our high-net worth investors and the next deal we’re chasing in Jersey is another deal that will deliver similar returns. We wouldn’t typically consider retail investments as many UK High Streets remain fragile, however, Jersey is an island with one high street, a queue of retailers requiring a presence and a captive market. That all adds up to a solid investment.
Strong income returns
While it’s true there is fierce competition from major institutional funds, we are confident of buying more quality assets for investors and continuing to deliver income returns of up to eight per cent per annum – compared to the one per cent you can usually expect from the mainstream banks.
There’s more confidence back in the market and tenants are beginning to commit to longer leases. We are also seeing a growing appetite among high net wealth individuals for this type of investment.
With this type of investment there is a huge difference between the return on a Government gilt, which is typically 2.5-3 per cent. Commercial property is delivering average returns of around 6-7 per cent and we are doing better than that.
Minimising property investment risk
Risk in this sort of investment is minimised by buying properties in prime locations that offer strong prospects for growth through lease renegotiation or property conversion.
We aim to buy bullet-proof assets. There is still a significant lack of quality stock and you have to be careful, but we are still confident. We look to operate in a niche area, picking up properties that are too expensive for individual investors but that are too small for the big institutional funds.
The big funds are coming in with such an impetus that they are driving up prices by competing amongst themselves. We don’t wish to play on their ‘pitch’ and consequently have been finding value in alternative property assets such as the whisky maturation warehouse and the current Jersey offering.
Confidence in future of property
We are being careful and selective. Syndicated property investment still offers a good, long term, predicted income stream above market level. Interest rates will be slow to recover and we are way ahead of what the banks can offer.
While many are still wary of syndicated commercial property investment, for the right investor, this is a sector that can deliver solid returns and rising confidence in the market means the opportunities are continuing to grow.
We are confident about what lies ahead for commercial property and I’d welcome your thoughts on what you expect to see in the months ahead and whether you think investor confidence will continue to rise.
What type of property should I invest in? What are the biggest commercial property investment challenges? How safe is commercial property investment? James Craven, the managing director of syndicated property investment company Rougemont Estates, answers the key questions for people looking to invest in commercial property.
What’s the biggest challenge to finding the right properties for investment?
The big issue at the minute is a lack of available investment stock to buy. The occupier market is picking up and demand is growing, but there is a significant lack of new quality space being developed.
Those who are unable to move are just renegotiating preferable lease terms with their existing landlords and seeking to reduce their overheads. This means there are very few new long term leased investment properties being created and made available outside of the supermarket or hotel sector.
There is a two tier market, long term secure income which is in demand and benefitting from premium prices and then there is the secondary short term leased market where banks will not fund purchases and landlords can’t find occupiers.
This secondary market is consequently being heavily penalised by the marketplace due to the risk involved. Transversely prices remain competitive for secure long terms income due to the flight to security.
What particular types of property are most attractive for investors and why?
Properties that are located in strong city locations, with leases to financially strong tenants, in excess of 15 years with rent reviews every five years that are linked to the Retail Price Index (or CBI) are the ingredients everyone is after.
These are attractive due to their risk-free nature, plus growth is obtained by the rents increasing in line with inflation (RPI & CBI).
We also consider assets that are in prime locations but are being undervalued purely due to the lease length remaining. For example, even nine year unexpired leases are being devalued as opposed to 12 years which is deemed acceptable.
Therefore, if we can target undervalued assets in prime locations with in excess of 8 years of income remaining, the location, rental level and nature of the property should underpin the prospects for a good long-term investment.
How safe is commercial property as an investment?
For many investors who purchased assets between 2005 and 2008, the bubble will have burst on them largely because they will have borrowed from the banks to acquire assets and the banks all wanted their money back.
On the other hand, we typically only acquire with cash funds and so, although the capital value of the property may have been affected as a result of the deflation of values, our investors’ income stream remains unchanged provided the tenant has remained in business.
Consequently, our investors were not forced to sell their properties at the worst possible time.
What happens if there is a further downturn in the commercial property sector?
It is unlikely we will see another commercial property downturn in the near future because there is very little available space at the minute. When we entered the last downturn we had a surplus of supply and that had a heavy impact on the sector.
However, that space has now pretty much gone and we are faced with a severe shortage. With occupier demand rising and limited development happening, we will see strong rental growth as developers slowly work to provide the space these businesses need.
There were also some harsh lessons learned from the last downturn where a lot of people were left sitting on empty stock with draconian rates to pay. No-one will be keen to see a repeat of that and I don’t expect to see any speculative development for some time yet.
Syndicated property is not affected in the same way during a downturn. Because syndicates are typically purchased with cash funds and sensible levels of borrowing, there are no third party pressures from a lender seeking to sell the property at the worst possible time. It is therefore a matter of time for the syndicate to hold the investment, continue to enjoy the income stream from the tenants rent and wait until values improve before then looking to sell.