28th April 2015
What are the secret ingredients for successful property investment?
Much has been said of late about New York reclaiming its crown from London as the world’s number one destination for commercial property investment. Granted, these two global giants constantly jostle for the top spot, but what is interesting about this is what it means for property investors in the UK.
The eagerly-anticipated annual survey from the Association of Foreign Investors in Real Estate always causes a stir and, despite being released a few weeks ago, the implications are still being debated and it has led to a wealth of further articles arguing that the super-wealthy will also turn their back on the UK capital in favour of The Big Apple.
In truth, London will undoubtedly claim the crown again and these findings are being fuelled by the incredible strength of the property market in the capital over recent months. London has seen massive amounts of investment, most notably from overseas investors, and it has overheated. Prices are high and it has become extremely difficult to secure decent returns. Unsurprisingly, investors are looking elsewhere.
But, what does this mean for investors who still want to put their money in the UK which is seen as a stable safe haven for commercial property funds?
Investors looking beyond London
For most, they are now looking to the UK regions. With development only just firing up again in our regional centres, supply has become limited and that is fuelling rent and yield rises. Overseas investors are already looking at regional opportunities, but the biggest spender in this sector are the UK institutional funds.
Our homegrown funds increased their exposure to regional markets by more than a third last year and when you add in property funds, occupiers and private investors, their total share of the regional market now stands at 60 per cent.
Domestic investors have stolen a march on the UK regions and are reaping the rewards. It’s inevitable that overseas investors will soon follow suit, but there are still some great opportunities in the UK for those who know what to look for.
The ‘Golden Triangle’ for property investors
Another recent piece of research named York, in the heart of Yorkshire, as one of the best cities for investment in the UK. Rougemont has already invested in York, recognising its continuing quality and potential for further growth, and this city is a prime example of what regional investors should be looking for.
York is one of the UK cities that are often referred to as “Little Londons”. Others that fall into this category include Bath, Cambridge, St Albans, Sevenoaks and Oxford and that’s because they all share similar characteristics.
Each city has solid commuter connections, a strong and growing economy and offers excellent quality of life. Estate agents refer to these key ingredients as a “golden triangle” for homebuyers and it’s equally as relevant for commercial property investors.
In Yorkshire, the golden triangle for investors is often referred to as “Betty’s Triangle”. It’s named after the world-famous tea shops and links the affluent tourism hotspots of Harrogate and York with the economic powerhouse of Leeds.
This triangle has extremely solid transport links, London is two-hours by train and it has an international airport, the economy is diverse and growing strongly, and the quality of life is exceptional – quality homes and schools, incredible countryside and rich and varied tourism and leisure are on offer.
Put these together and you have a strong draw for business, and with new business comes new commercial property opportunities.
Investing in properties with potential
There are many examples of these golden triangles around the country and they don’t have to be on a regional scale to offer investors great opportunities. Look for the winning ingredients and, even if it’s a relatively small town, you can be sure to find properties with potential.
We’ve talked at length before about Rougemont’s continuing efforts to find the “pockets of value” when we are hunting for syndicated commercial property investment opportunities and they are still out there.
Critically, investors now have to take more risks if they want to match the returns they have seen over the past five years. Just a year ago, we could buy 10 year leases to quality tenants in grade A located buildings for 7.5%. This is now 6.5% 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 return are not attractive.
Investors 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 7.5% – 8% plus.
Ultimately, competition is fierce. The UK funds are moving heavily into the regions and the overseas investors won’t be far behind. However, if you look for the key ingredients and look for properties with potential for growth and/or alternative uses, there are still some great opportunities for investors.
I appreciate many of you will have different ideas and tips on what to look for in property investment and it would be great if you could share them in the comments below. Likewise it would be interesting to gauge appetite for short term income investments but with very good prospects of medium term capital growth.