From the birth of Canary Wharf, through the millennial boom and global financial crash, the UK property market has experienced a turbulent ride during the 25 years that we, initially as IPD and now MSCI, have been analysing property performance.
An air of positivity has begun to pervade the sector and while it is clear that growth has finally spread out from the capital, the nature of this particular regional recovery is not the same as those before it. Investment managers will have a challenging time trying to keep track of all the metrics and influences playing a part in the UK market.
In a data-rich world, a plethora of market and economic fundamentals is continuing to have a pronounced effect on performance, with London’s ongoing population growth, and the impact that technology is having on shopping and leisure, among the trends influencing market data in recent times.
Eight years after the 2008 crash, headline domestic property prices remain 21% below their peak, according to MSCI’s IPD Quarterly UK Property Index. Comparatively, eight years on from the 1992 recession, prices were 4% higher than the trough.
Slow regional recovery has put the brakes on the real estate upturn: though public investment poured into Britain’s cities in the late 1990s, all UK regions suffered during the last financial crisis. Now, many districts outside London have started to deliver improved performance as they recover from such a low base, with regional offices in the UK reporting a 9.4% uplift in values and the rest of the UK industrial values up 14.9% during the year.
Regional income yields are more competitive than those in London and the South East – averaging 6.7% for offices. This late bloom of regional and secondary markets has occurred just as yield compression at the prime end dips below 4% in some areas – and down to 3.4% in the West End.
Coupled with this, the retreat of traditional UK lenders and high street banks from funding development means there is less supply. This amplifies the value of existing assets, as few people are building speculatively.
Within the cycle there are still many familiar trends. Prime – and now secondary – yields are dropping as the market continues to recover. The Gherkin’s sale at a reported 3.8% yield and regional shed deals below 6% are cases in point.
Regional expansion has been underpinned by the UK’s improving economic prospects over the past 12 months. Office rents rose by 1.3% last year outside of London and the South East as businesses, buoyed by GDP growth and falling costs, took more space.
This investment and returning regional confidence played a key role in boosting 2014 UK annual office returns to 16.9%.
Net investment, as a proportion of previous market capital value, was 19% for offices outside of London last year, and 16% into regional industrials, compared to West End offices in London, which saw disinvestment of 2% as some UK institutions sold out of strongly priced locations to overseas investors.
This shows that as in any cycle, confidence is growing and a greater appetite for risk is emerging knowing that consistent prices can be achieved.
But behind all of this is one major difference. We are now in a global market, inextricably linked to Europe, the US and Asia. The effects from these economies will have just as much effect as those at home.
Quantitative easing is feeding part of Europe and Japan with cheap money, keeping interest rates on the floor. Property has historically thrived in such an environment.
Alongside this, government bond yields remain low, and compared to a 1% gilt, 4% in the West End looks competitive.
But while Eurozone fears have been allayed for now, the recent Swiss currency de-coupling highlighted that the unexpected can have a significant effect on the markets. Yet since the turn of the year, stock markets in Britain, Germany and Japan have touched record highs.
Growth may spread out, but appetite for property is more concentrated than ever, and asset managers will be watching their holdings with more of an eagle eye than usual.
Phil Tily is executive director, MSCI
