The value of UK commercial investment transactions in 2013 rose 60% to £53.6 billion from £33.5 billion in 2012. 2013’s total was the highest since 2007 as investment in Q4 reached the highest quarterly level since at least March 2000. Central London was the focus of 45% of all investment transactions in 2013 with the Rest of London and the South East accounting for a further 20%.
For a four year period ending in 2007 investment transactions averaged £54.6 billion a year as the commercial market bubble inflated. Average investment in every other year between 2000 and 2012 totalled no more than £35.8 billion and averaged £30.8 billion.
Perhaps then it is no bad thing that the value of UK commercial investment transactions in Q1 shrank 60% to £8.4 billion from £21.20 billion in Q4. In the light of this, Q1’s performance at least bears more favourable comparison to long run average quarterly investment of £9.4 billion.
Across the regions the most popular destinations for capital in the last five years have been the North West, Scotland and West Midlands. Indicating perhaps that investors in commercial property are less daunted by the prospects for an independent Scotland than the rest of the business community. The least popular destinations were the North East, Wales and East Midlands; which is not surprising as these are the three smallest regional economies.
In the five years to 2013 overseas investors accounted for 18% of all purchases in the regions outside London and the South East; whereas 61% of Central London purchases originated overseas.
Over the last five years, investor’s most popular cities were Manchester, Birmingham and Glasgow. Manchester and Birmingham have the two largest city economies outside London and the South East and Glasgow remains the UK’s biggest regional office market.
The least popular of the UK’s larger centres were Edinburgh, Bristol and surprisingly, Reading. Reading is the largest office centre in the South East, the seventh largest in the UK outside London and has the third largest local economy. Its office vacancy rate, however, remains high at 17% whilst total availability is even higher at 21% of stock. The industrial vacancy rate is 13% and total availability is 16%. In both office and industrial markets the absorption rates over the last twelve months are negative; that is to say that more space is still coming onto the market than is being let.
As Central London assets become more expensive and the economic recovery spreads to the regions, investors should feel more comfortable moving up the risk curve and buying into the regions and cities beyond London and the South East. There is anecdotal evidence of this activity. Aviva Investors launched the UK Real Estate Recovery II Fund, an ungeared fund that will invest in UK commercial real estate with a focus on secondary assets, in the second half of last year. St. Modwen, a Midlands based Property Company and developer said at the end of 2013 that it was starting to see an increase in occupier demand outside the South East. At about the same time RBS sold its first portfolio of distressed UK commercial property assets. The 28 industrial distribution units in the 2m sq ft “Sapphire” portfolio had a guide price of £63m and were sold to a hedge fund. Other hedge funds have also announced plans to buy property in northern England and the Midlands.
The decrease in investment levels in the first quarter was a nationwide feature. Investment across London and the South East, however, fell 73% while investment in the Rest of the UK was down 41%.
In Q1 2014 rolling 12m investment in industrials increased by 7% to £4.2 billion; 75% of this total was invested in the Rest of the UK regions. Rolling 12m investment in Rest of UK offices increased by 12% in Q1 to £2.3 billion.
Investment in the West Midlands, North East and Wales grew quarter on quarter. The biggest transactions in Q1 being Intu Properties purchase of Merry Hill Shopping Centre; Aberdeen Asset Management’s purchase of Cardiff’s Capital Shopping Park; and the BBC Pension Fund’s purchase of Time Central, Gallowgate, Newcastle upon Tyne.
Overseas cash flows may slow from hereon but it is highly unlikely that they will be reversed. After factoring in currency movements, overseas investors in Central London assets under-performed domestic investors in the same asset class for all of the last five years bar the last nine months because of the weakness of sterling. As sterling hardened against world currencies from the middle of last year, this situation has now been reversed and existing overseas investors are now out performing domestic investors. Whilst the recovery in the value of sterling benefits existing overseas investors, it does, however, mean that overseas investors face higher price barriers to entering the UK market.