Could the potential £92m-plus sale of the Grafton Centre attract the first big overseas buyer to Cambridge? It easily could. Foreign money is beginning to find its way into the city’s low-volume but high-excitement property investment scene.
Chinese investors are said to have been on road trips, and European money is on the prowl, but as yet it is hard to point to many deals in which foreign money has changed hands. However, the UK institutions and private investors who have dominated the market for years know it is on its way.
And no wonder overseas investors are interested. Industrial yields plunged to 5.5% in 2014, and office yields are expected to dip below 5% over the next 18 months, according to Bidwells research.
Saul Western, partner at the Cambridge agent, explains: “We haven’t seen Chinese money change hands yet, but they are looking and I can see it happening soon, perhaps first in the private rented sector, where the opportunities are more plentiful.”
However, cautions over the relative scarcity of things to buy – and the small lot size of much of the stock that reaches the market – will always lessen the appeal to many overseas investors.
Western says: “The sale of the Grafton shopping centre will be interesting. It is the kind of larger lot that overseas investors need. There is an asset management opportunity there that the UK institutions will look at, but maybe also overseas investors, simply because it is rare to see a lot that size in the city.”
Most lots are appreciably under £50m. Indeed, the sale of Cambridge Research Park to Rockspring Property Investment Managers by Clearbell Capital for £21m – plus a further £11m to complete speculative construction of an 80,000 sq ft scheme – is regarded as rather beefy. The site includes 78,000 sq ft of office space and 26 acres of undeveloped land to the north of the city.
But yields are tightening. F&C REIT Asset Management Dublin’s sale of a multi-let trade counter and warehouse scheme to Orchard Street Investment Management at Cambridge Commercial Park for £5.9m marks the trend, at 5.5%.
Indeed, Orchard Street has been hyperactive in Cambridge. Its long list of deals includes the Beehive Centre (£100m), funding Brookgate’s One Station Square (£80m), funding a Microsoft building for £35m and buying the Vue cinema, as well as St Andrew’s House (£15m), Coldhams Trading Estate (£25m) and the Vitrum Building (£7m).
Andrew McGahey, director at MP Real Estate, says: “Orchard Street achieved what others would have liked to do. They got in early before the market realised how fast Cambridge was recovering.”
Says Western: “The Cowley Road deal was very keen, and Orchard Street won out over 20 bidders. Office yields are falling too. We could get to 5% quite quickly, and indeed may already be
there if we had the property to sell
which could prove it.”
In such a competitive market, off-market deals are beginning to seem attractive, says Michael Summers, Howard Group’s director of property investment. Howard has been adding to its Cambridge holdings, which already include the Iconix trade park. The most recent is the £10.7m purchase of Mount Pleasant House in central Cambridge. Refurbishment is likely.
“We are starting to relocate our smaller historic investments into Cambridge. We are finding it is highly competitive, so we have bought off-market,” says Summers, adding: “It is not necessarily cheaper, but you avoid the frenzy. At Mount Pleasant House, we went to a third round of bidding and the yield was 6.5%. Undoubtedly, yields will be pushed lower.”
Savills’ associate director James Emans says that with “fantastic” prospects for rental growth and a relatively recession-proof local market buoyed by new tech arrivals, investors do not need persuading.
“Investors find it easy to convince themselves about Cambridge, so I expect to see office yields down in the 4% range before too long,” Emans predicts.
Hard graft
M&G Real Estate’s sale of Cambridge’s 500,000 sq ft Grafton Centre comes after years of stalled development.
Prupim acquired the centre in 1997. Grand proposals emerged, then sank. The latest plan – for a £15m refurbishment – was floated in 2009.
Cushman & Wakefield has been instructed on the £92.5m sale, quoting a net initial yield of 6.25%. The net rent roll is £6.14m, 92% of which is secured against national multiples, with 76% expiring in more than five years.
Andrew McGahey, director at MP Real Estate, says: “There will be strong competition because the Grafton is designated for expansion.”
It is anchored by Debenhams, Next, H&M, TopShop and New Look, plus an eight-screen Vue cinema, which changed hands in a separate £9.6m deal earlier this year.
