29th September 2015

Will the commercial property bubble burst?

There has been a lot of talk in recent months about a looming commercial property crash and horror story headlines like “London bubble set to burst” but, in reality, these scaremongering tales are unfounded and premature.

Commercial property investment continues to be one of the safe havens for investor cash and the latest report from CoStar, a leading commercial property research organisation, shows that the appetite for these assets continues to grow.

The UK Commercial Property Investment Review Q2 2015 shows that we are on track for another record year of property investment and both the capital and the regions are continuing to be hugely attractive destinations for investors both at home and overseas.

In this latest blog I consider some of the findings of the CoStar report and consider what lies ahead.

The UK is one of the most active property investment markets in the world

There’s some fantastic insights in this video from CoStar, but perhaps the most important message is by founding partner of GM Real Estate Tony McCurley who says the UK is “on everyone’s shopping list”.

London remains the top global city for investment while the whole of the UK was the most active investment market in the world after the US over the past 12 months. We’ve seen another phenomenal year with £73.6bn poured into commercial property and it isn’t showing any signs of slowing down.

We saw a total of £16.8bn invested in the UK in Q2 of this year, which was up 8% on the previous year, and £6.5bn of that money came from foreign investors, an incredible 44% increase on 2014.

Despite fears that falling yields in an overheated London market had seen it pass its peak, the research showed that the capital bounced back with investment surging 61% quarter-on-quarter and attracted £8.7bn in investment, up 46% on last year.

The UK regions also remain a hugely popular destination for investors as they continue to deliver the best yields and rental growth. For example, investment in the North East was up by 131% on the five-year quarterly average, with £308m invested in commercial property.

Why is the UK so attractive to investors?

The UK remains one of the most attractive investment destinations for a number of reasons. The main reason is the continuing strength of the economy and its fast growth. However, traditional draws like the market transparency and political stability have always provided a high degree of comfort for investors.

When you couple this with the potential for further growth in the regions and the continuing strength of the capital, it makes the UK an obvious choice.

Another major factor is the continuing instability around the globe. With the neverending woes in the Eurozone, conflict across the Middle East and Russia and China’s economies in turmoil, investors inevitably are looking to find safe havens for their money and the UK is proving to be a solid bet.

How are the individual commercial property sectors performing?

The report also shows its good news across the individual investment sectors. The office sector surged ahead in Q2, accounting for almost half of all investment. The strongest performers were London and the South East but I expect the regions to get stronger over the course of the year as we’re continuing to see a rise in demand and a number of new developments are now finally coming through the pipeline.

This rising demand coupled with a lack of available office space is also turning into optimism for developers and that will also see the return of speculative projects in the months to come.

Again industrial was a top performer and that is reflected across the country. The only blip was a drop in retail investment – which fell to its weakest level in two years – but that will recover in the second half of the year due to a number of major centres due to come to the market.

Yield compression also resumed strongly, reversing the brief upward movement we saw in Q1. The average all property yield compressed to a five-year low of 6.88% as yields fell in all sectors. With furious competition continuing in London, office yields also sank to a new low of 4.2.

What lies ahead for commercial property investors?

In my own opinion, property investment will remain to be a safe bet. As I said at the start, the likelihood of the bubble bursting is slim. While London is seeing a significant slowdown, I believe that’s just a sign that the capital is now stabilising and the regions still have plenty of room for growth.

This growth and soaring occupier demand will fuel confidence for investors and developers alike and we’ll see a raft of new speculative development in both the office and industrial sectors in the regions. There’s also still a huge weight of money looking for a home and that will deliver robust trading in the months ahead.

Yes, there are still some draconian elements to the market that dampen spirits a little – the threat of empty rates still continues to frighten developers – but that will only stall values briefly while everyone catches up.

The threat of an interest rate rise also still looms large on the horizon, but any increase will be very slow as the Bank of England looks to nurture the growth in the economy.

There’s been much talk of the impact of a Brexit – Britain leaving the EU – and even though this is unlikely, it will have little impact on property as it’s rarely heavily affected by short-term politics.

Couple all this with the continuing instability in a number of economies and nations around the world and the UK will continue to remain on every investors shopping list.