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.
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.
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 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.”