19th November 2014
Residential property prices have probably peaked for now – especially in London and surrounding areas.
But commercial property appears on the cusp of a major upswing with huge investment inflows from overseas.
As Ainslie McLennan of Henderson Global Investors puts it “the strengthening UK commercial property market has attracted global interest with its attractive yield profile and steady returns continuing to attract a broad range of investors.”
She cites research by commercial real estate services firm Cushman & Wakefield which finds “investment volumes into the asset class increased by 49 per cent to £58bn in the year to 30 June, with around 40% of this capital flow from overseas.”
So what’s behind this new found enthusiasm for our shopping malls, office blocks and business parks?
Economic growth prospects
In a world characterised by slow or negative growth, the UK’s strengthening economy is attractive. With just over a month to go, the International Monetary Fund predicts that the UK will be the fastest growing developed economy in 2014. That’s all relative rather than absolute, of course but the UK has the added plus points of political stability, an improving employment market and a capital city that remains a global financial and logistical hub.
None of these is new but combined with a recovering economy, they spell out real estate gains.
But there is a further reason for international investors to put their money into UK property – the real estate market itself which is marked out from competitors by its breadth, depth, liquidity and maturity. These aspects of the commercial property market further strengthen the investment case. They give foreign investors a feeling of security.
London is still paramount
Foreign investment still remains highly concentrated in London, particularly the Central London office market. But foreign investors are not willing to overpay. The Qatari offer of £2.2bn for Canary Wharf has been dismissed as “insulting” by owners but where is the rival bid? It could be a choice between taking the money and not selling. In any case, the history of large buildings in London is often contentious – witness the finances of The Shard which has struggled to fill its space with paying tenants. With technology and media companies the keenest to acquire space, property owners have to provide what they want – and many do not want to be on the umteenth floor of a building, no matter how prestigious the architecture and iconic the space.
The US and the Far East were the dominant overseas investors into the UK commercial property market in the first half of 2014. In the same period, London was the most popular global city for Chinese institutional investment following the flow of £1.4bn into the asset class.
Investing outside the capital
Overseas investors tend to be cautious when it comes to regions outside of London and, to a lesser extent, the South East. Around 15% of overseas investment into the asset class was used to acquire non-London area properties during the last five years.
But that could be changing in just the same way as residential price growth can spread out from central London. Buyers look for competitive pricing, limited supply, rising demand and yield compression. And they can find all of this outside the capital so demand is growing.
Foreign investment into UK regional property rose to 20% in the first half of 2014, forcing traditional buyers such as UK property funds to become innovative, which has seen a growing demand for alternative assets, such as private healthcare, hotels and student housing.
These specialist assets often yield more than prime office, retail and industrial sectors. Coupled with lease lengths which can be 20 years or more, investors see a good duration of income. These reasons, combined with an ageing domestic population, no doubt helped persuade a Wall Street hedge fund to acquire 27 elderly care homes spread across Britain earlier this year.
Henderson realises that some investors have concerns about the weight of overseas money entering the market. But, McLennan says, the forecast return to health of the UK economy and a strengthening occupier market should dispel this fear.
She concludes: “Commercial property returns are expected to be underpinned by rental income and the potential for some capital growth, particularly in the regions given that London has already seen significant gains. Rental value growth is expected to take over as the driver of returns in the longer term. This is expected to be particularly strong in London and the South East based on strong occupier demand pushing up rental values in key locations.”