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.
London is recognised as the world’s top city for commercial property investment, but we have seen a dramatic swing away from the capital in recent months. High-net worth individuals, major funds and property syndicates seeking alternative investments are now looking to commercial property in the UK regions for solid returns and a high-level of security.
The latest research from commercial property agency Knight Frank shows investment activity in the regional cities soared to a seven-year high in the latter half of 2013 as a wave of institutional money turned its back on London.
This is fuelled by savvy investors who are now looking to get more for their money and more realistic returns.
Investment growth
These UK investors, alongside a swathe of foreign direct investment (FDI), propelled investment turnover to £1.63bn in quarter four of last year – the strongest quarterly total since quarter three of 2007.
But why are investors looking beyond London? Put simply, prices in London have soared because overseas investors have invested heavily in the city as they look for a safe haven away from the recent economic turmoil.
CoStar’s UK Annual Investment Bulletin shows commercial property investment deals reached £52.7bn in 2013, with two-thirds of that money invested in central or Greater London.
That presents significant opportunities for UK investors who know how to make the most of the regions. With investors now looking elsewhere, the weight of money targeting the regional markets has given rise to significant price increases.
Hardening Yields
Knight Frank’s research shows yields from prime stock have hardened by c.50 to 75 base points in the past year. With the rate of yield compression easing, performance will be driven by the recovery in the occupier markets.
Take-up across the regions is growing dramatically once again and that means quality space is running out. For investors, this diminishing space means we should see improved rental growth in the coming months.
It’s a good opportunity and that is why investors are looking to the regions. They are capitalising on falling yields, rising rents and soaring occupier demand.
Direct Foreign Investment
In 2013, the combined effect of a low-interest rate environment, increasing stability in the eurozone, the continuing recovery of the UK economy and the swathes of foreign investment cash meant that demand soared for commercial property investment.
That trend will continue throughout this year. The rising demand among occupiers and the diminishing availability of quality space will ensure that investors both at home and abroad will continue to seek UK opportunities.
Rental Growth
London will remain popular – it’s rumoured that £25bn of funds is currently chasing £1bn of available property in the capital – and that will mean prices will continue to rise for investors and occupiers alike.
But that means the momentum will be in the regions. With occupiers chasing quality space outside London and the trend for “northshoring” growing, this will trigger further rental growth, a rise in occupier demand, speculative development and the number of investment deals will continue to grow in the major regional cities.
This presents significant opportunities and the investors who seek out regional stock with the potential for active asset management will see solid, long-term returns.