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…
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.