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.
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.
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.
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.
Unregulated Collective Investment Schemes (“UCIS”) have been dominating the financial headlines over the past two years whilst the Financial Conduct Authority (FCA) has grappled with the lengthy process of ensuring that retail investors do not fall foul of inappropriate advice regarding such schemes.
The result of the FCA’s review is a complete ban on the promotion of UCIS and “close substitute pooled schemes” to the vast majority of retail investors in the U.K. and the introduction of a new regulatory framework governing the operation and promotion of such products.
Under the new regulatory framework, investments such as these can only be promoted to sophisticated or high-net worth investors, or to authorised professional advisers..
Non-Mainstream Pooled Investments
UCIS and close substitute pooled schemes – which are collectively known as Non-Mainstream Pooled Investments (“NMPI’s”) – cover everything from syndicated commercial property and unit trusts set up for tax-exempt investors, to investments in fine wine and forestry / timber; all which are viewed as alternative investments. These types of investment have traditionally been perceived as riskier due to the complex nature of some of their fund structures and the fact that many of the schemes have been highly geared and illiquid in nature; however, that is not the case for every type of UCIS.
The FCA’s review of these types of product has been brought about by a large number of retail investors having lost significant sums of money because they did not fully understand the nature and operation of the schemes in which they were encouraged to invest. In many cases investors had not benefitted from appropriate advice on the suitability of such investments, particularly having regard to their personal circumstances and investment expertise.
However, the FCA has also recognised that some of these schemes do have significant benefits for certain investors, hence the arrangement whereby investors can declare themselves sophisticated investors or high-net worth individuals, thereby enabling them to continue taking advantage of alternative investments.
Alternative Investments
When it launched 5 years ago, Rougemont Estates recognised the importance of being an FCA regulated company and it dedicated significant time and resource to becoming appropriately regulated.
Whilst the new statutory regulations may seem like a major headache to many, they are welcomed by Rougemont as they deliver a long awaited legal obligation on all promoters of such products to provide a uniform high level of transparency in their dealings with investors.
Therefore, there is now a regulatory as well as moral obligation on business operating in this sector to ensure that investors know just exactly what it is they are investing in, what the benefits and risks are of the investment, what return they will receive and when, and what fees the promoter of the product is making from the investment.
Despite these new changes syndicated commercial property investments are still viewed as a riskier alternative asset investment and whilst Rougemont is regulated by the FCA, their actual investment promotions are not; this means that investors may not be protected by either the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS).
However, with an investment in tenanted commercial property investors always retain the value of the land and buildings. Clearly, the main risk is that the tenant becomes insolvent and defaults on its lease obligations; therefore, careful assessment of the tenant’s covenant strength combined with detailed due diligence into the terms of the lease and a rigorous appraisal of the quality of the building itself, its geographical location and its potential for alternative uses are all considered prior to an opportunity being promoted.
Syndicated Commercial Property and liquidity
A major benefit of investing in syndicated commercial property is the freedom for investors to participate in a wide range of well researched, high quality, tenanted properties. Investors can choose to have their commercial property exposure in just one, or a range of diverse property classes and tenants, whilst at all times retaining ownership of their specific pro – rata share of the actual property itself. Syndicated commercial property provides an investor, wanting to invest in commercial property as part of a balanced investment portfolio, the opportunity to do so at levels of financial investment that would not normally deliver exposure to such high quality properties and tenants.
One clear downside with such investments is liquidity and in the case of Rougemont, other than within its client base, there is no established secondary market for the investment. Accordingly, investors have to be prepared to consider such investments as illiquid and be held as a medium to long term investment. However, it is worth noting that when clients have sought to liquidate their investment Rougemont has, to date, never failed to secure a sale of the holding on a client’s behalf. The process is benchmarked against an annual independent valuation and the transaction typically takes two/three weeks.
An alternative to syndicated commercial property is an investment in an established regulated real estate fund, where there is no direct ownership of the asset and all investment and management decisions are made by the fund managers. These investments are viewed as having a much higher degree of liquidity, with investors normally being able to disinvest at will; however, this is not always proven to be the case. In the early stages of the recession, Aviva prohibited investors from exiting their fund while they battled to meet the scale of investor redemptions and seeking to avoid being faced with having to sell off commercial property below their market value to repay investors.
Co-investors
A further benefit of the UCIS promotion rules is the knowledge that your fellow investors will be like-minded individuals. By only promoting to sophisticated or high-net worth investors, you can be reasonably confident that your co-investors will have the necessary experience to participate in making informed commercial decisions regarding the future management of the asset.
Syndicated commercial property investments, promoted and operated by FCA regulated companies, allow investors the freedom to invest in and own their dedicated percentage of a well tenanted quality commercial property, delivering regular quarterly returns with the potential for capital growth.
The FCA recognises this and by now formally establishing a new regulatory framework, advisors and investors can take comfort in the knowledge that every aspect of the business and its promotions are both transparent and ethical.
Unregulated investments are riskier but the rewards can be greater and, most importantly, investors retain control.