Institutional Investment in Property

The uncertainties surrounding the UK’s future relationship with its biggest and nearest trading partner continue to create strong headwinds for the economy. UK GDP was estimated to have increased by just 0.2% in Q4 and 1.4% in the last 12 months. Economic growth was last this low in 2012 and last weaker in 2009

MSCI data indicates that All Property values contracted in Q1 for the second consecutive quarter. The rate of capital value growth as measured by the MSCI Monthly index decreased from -0.2% in Q4 2018 to -0.8% in Q1. The market decline is wholly attributable to yield impact of -0.8% as there was no Rental Value Growth. The initial yield on MSCI’s monthly index has increased from 4.94% in Q4 2018 to 5.02% at the end of Q1.

Institutional investors bought commercial property in Q4 2018 acquiring property assets worth £1.47bn and recording sales of £1.24bn. Net investment in Q4 of £235mn compared to net investment of £312mn in Q3. In the 12 months to December, net investment by institutions amounted to £1.32bn compared with net disinvestment of £742mn in the 12 months to September and net disinvestment of £1.52bn in the year to December 2017.

In the fourth quarter, pension funds invested £80mn compared to a net disinvestment of £6mn in Q3. Total investment by pension funds in the 12 months to December amounted to £270mn compared to £156mn in the 12 months to September and £655mn in the year to December 2017. Life companies were net buyers of property for the fourth consecutive quarter. Net investment in Q4 amounted to £87mn compared to £235mn in Q3. Total investment in the 12 months to the end of December amounted to £916mn compared to disinvestment of £886mn in the 12 months ending September and net disinvestment of £1.55bn in the year to December 2017. Property Unit Trusts invested £45mn in Q4 compared to investment of £222mn in Q3. Net investment in the 12 months to the end of December amounted to £98mn compared with net investment of £91mn in the 12
months ending September and disinvestment of £429n in the year to December 2017 (National Statistics, 2019).

In Q1 2019 preliminary estimates indicate that total investment in UK commercial property by all domestic and overseas investors decreased by 53% to £8.0bn from £17.1bn in Q4.

Investment in Central London offices decreased by 68% to £1.3bn in Q1 from £4.0bn in Q4 2018. This key market segment made up 16% of all UK transactions in Q4 compared to the long run average of 29%. Net investment in Q1 also decreased across all other market segments compared to Q4 with the exception of Leisure. (Property Data, 2019) Investment by UK institutions and property companies decreased by 62% in Q1 to £3.6bn from £9.5bn in Q4 2018. Money into UK commercial property from overseas investors decreased by 41% in Q1 to £4.4bn from £7.5bn in Q4 2018. Overseas investors share of the UK investment market in Q1 amounted to 55%.(Property Data, 2019)

The largest deals of Q1 were for hotel, residential and leisure assets. The Grange Hotel portfolio was acquired by Queensgate for £1bn; the Westfield residential estate was sold for £503mn; and a portfolio of restaurants and bars was bought by Davidson Kempner Capital for £348mn.

Total institutional investment in Q3 was negative for the third consecutive quarter. Net disinvestment amounted to £11.7bn compared to net disinvestment in Q2 of £3.5bn. Investors sold Short Term assets and continued to limit their exposure to risky assets by selling UK Equities and Overseas Securities and increased their holdings of UK Gilts. (National Statistics, 2018)

Industrial real estate

Demand from logistics operators drives performance

Industrial or logistic assets have been the best performing segment of the UK real estate market for the last 3 years and in 4 out of the last 5 years. Indeed, industrial assets have been the best performing segment since the end of the GFC, providing an annualised performance of 12.1% a year over the last 10 years.

This performance has been driven by both rental value growth and yield compression. Rental value growth in the UK has averaged 5% for the last 3 years compared to a long run average in the 20 years beforehand of less than 2%.

Investors have been drawn to the segment and bought into the e-shopping story and the idea that “retail’s pain is industrial’s gain. Industrial investment volumes have climbed as the level of retail investment has fallen.

MSCI have argued that investors have been attracted to industrial assets as a late cycle search for yield. Traditionally industrials have always provided a higher yield than retail or office property. But for the first-time industrial yields fell below office yields in 2017; and below retail yields in 2018.

In the UK, rental value growth has been driven by the limited supply of well located, newly-built stock, the growth of on-line shopping and the demand by occupiers for both large strategic fulfilment centres and multi-let estates with much smaller units for last mile deliveries. Most recently the demand for warehouse space has been boosted by the need to stockpile parts and goods ahead of a possible “no deal” Brexit.

According to Valuation Office floorspace data the Metropolitan counties of West Midlands, Greater Manchester and West Yorkshire each have 19 million m2 of industrial floorspace. The biggest industrial centres in England and Wales include Birmingham, Leeds, Bradford, Sandwell (West Bromwich), Kirklees (Huddersfield), Sheffield, Wakefield and Milton Keynes.

2018 investment in UK Property (£bn)

Source: National Statistics

2018 net Institutional Investment by asset type (£bn)

Source: National Statistics

Net Institutional Investment in Property (£bn)

Source: National Statistics

Investment by sector (£bn)

Source: National Statistics

Property investors by type (£bn)

Source: National Statistics

But only 4 of the largest 15 centres have seen any growth in the amount of floorspace since 2000 and only 3 since the GFC. Since the GFC the fastest growing major industrial locations with more than 1 million m2 of floorspace have been Daventry, Rotherham, Thurrock, Milton Keynes and Barnsley..

Across England and Wales the stock of industrial floorspace remained stable between 2000 and 2007 but has fallen by 5% since the GFC. Rolling 3-year new construction orders at the end of 2018 were down 37% on levels achieved at the end of 2007 (see Chart).

CBRE EMEA Logistics said that there has been record take-up for “big box” warehouses of at least 300,000 sq. ft. The most important consideration for the location of such facilities is proximity to a motorway. Clipper, a logistics business, confirms that a big site is required with access to the motorway network.

A typical example is the construction of a new logistics facility for retail giant Amazon at Doncaster’s iPort. The construction work encompassed a bespoke 1.1 million sq. ft warehouse. The site is accessed by the new Great Yorkshire Way link road which connects the M18 motorway with Doncaster Sheffield Airport and the iPort.

Total Return by City (3-yr annualised %)

Source: MSCI

Not all countries and markets have the same degree of online shopping penetration The UK has highly developed ecommerce infrastructure and more online sales than any other country in the world including the USA; and has twice the percentage of online sales than the rest of the EU combined.

In Europe, Germany has the strongest level of online retail sales. French ecommerce only has a 10% share of total retail sales. Spain and Italy, however, fall well down the ecommerce share rankings although their economies are the 4th and 5th largest.

Nevertheless, the relative out-performance of industrial real estate assets is not just UK specific, industrial out-performance has been a global phenomenon (see Table). This suggests that MSCI may have a point insofar as the main driver of industrial out performance world-wide is not just e-commerce.

The UK Warehousing Association (UKWA), whose 750 members have more than 9.3mn m2 (100m sq. ft) of space nationwide, said there was a shortage of space close to major cities for stockpiling goods in case of holdups at ports after a no-deal exit from the EU. Three-quarters of UK warehouse owners say their space is full to capacity and storage costs have soared by up to 25% in the past three months after a surge in Brexit-related inquiries.

A UKWA spokesman said the prospect of a no-deal Brexit had ramped up demand at a time when few developers had been building warehouse space without confirmed tenants because urban land was being prioritised for homebuilding.

It is understood that pharmaceuticals storage, which is handled by five specialist licensed operators in the UK, is at capacity while frozen and chilled food warehouses, storing everything from garden peas to half-cooked supermarket bread and cold-store potatoes, are fully booked until beyond April.

Almost one in five warehouse workers in the UK are EU migrants, according to the government’s Migration Advisory Committee. Workers from eastern Europe are returning home disillusioned with political developments in the UK after the Brexit vote. However, logistics companies are finding it difficult to recruit UK nationals into a tough working environment at a time of record levels of employment. Warehouse operatives therefore face a “severe labour and skills shortage”.

New Construction Orders (rolling 3-yr £bn)

Source: National Statistics

The highest density of large warehouses are concentrated around Northampton in the Midlands, which is the best place to reach the entire UK population. They also tend to be next to motorways in the countryside, where big plots of land are available. But because they are away from population centres, it is difficult to find workers. Staffline, a warehouse recruitment firm, said that many workers do not have cars to travel to warehouses in rural areas outside population centres.

Clipper has recently converted a former print plant by the M1 in Sheffield to warehouse use The entire 600,000 sq ft site is entirely given over to Pretty Little Thing, a fast-growing site selling cheap fashion clothing aimed at women aged under 30. It now employs more than 800 mainly British workers in a city miles from the traditional Midlands heartland of the logistics industry.

Sheffield in South Yorkshire is an ideal location. It has a young population, with unemployment above the national average at more than 4 per cent, and about 60,000 students. The M1 passes close to the city. Clipper said its aim was to locate warehouses near “chimney pots”, where potential workers — and customers — live.

CBRE EMEA Logistics agree that the scarcity of labour, especially in the south-east, is pushing some providers further north to gain access to labour. But predict that the industry would innovate to cope with the challenge of finding workers through AI; bringing robots into warehouses and locating smaller drop zones in city centres, from where autonomous or electric vehicles can deliver packages to homes.