The problems of the world’s equities markets are prompting an increasing number of investors turn to UK property investment.
China’s economic slowdown, uncertainty over Federal Reserve policy and growing pessimism about corporate earnings mean that global equities are heading for their worst quarterly performance for nearly five years. Global stock markets have shed more than $10tn (£6.5tn) in value during recent weeks to record their poorest performance since 2011.
Against this backdrop, there has been a “trickle down” effect that has seen investors of all scales increasingly looking to what they perceive to be the sounder fundamentals of property. In contrast to the jitters in the equity markets on the back of warnings on the performance of the global stock market, UK property continues to attract strong investor attention.
The strength of demand particularly reflects activity by private equity investors, which see a robust investment story. Growing occupational activity in the property market, underpinned by improved business sentiment, has extended well beyond London. This is driving rental growth in locations where demand is high and new supply is scarce. However, for many other locations we will have to wait a while before rents nudge up from their post-recession rebased levels.
Investments, particularly in the convenience store sector, which have annual or five-yearly RPI-linked increases, lack the inherent “excitement” of a rent review negotiation but offer inflationary protection.
In addition, private equity investors in the commercial property market are attracted by the opportunity to add value in order to boost capital and income returns. In the equity markets, performance – as we have discovered over recent months – is dictated largely by market momentum, irrespective of an investor’s stock picking ability. Experienced investors in the property sector are entrepreneurial. The ability to create value by taking a long-term approach is hugely appealing to them and is reflected in the characteristics of auction sales during the past 12 months.
The summer commercial property auction cycle saw investment volumes rise by 4% over the year to £141m. The sale rate reached a close to record high of 92%, with all office assets and London properties finding buyers. The autumn auctions have been similarly buoyant.
The outstanding example of this is the sea change in the sector that has been brought on by the government’s new planning policy. The permitted development rights regime has transformed the attractiveness of countless assets in the market. The scope that PDR now provides has had a transformational effect – particularly on large commercial properties which have the potential for conversion to residential use.
In the current equity market environment, burdened by volatility and weak return forecasts for the coming years, the appeal of a real asset offering a solid, long-term income return is understandable. We expect both these push and pull factors to boost private equity investor demand for commercial property further over the coming year.
A new source of capital is always welcome to the property investment market, but it will be important for new entrants to the market to differentiate between “new generation” assets where the rents have been rebased to reflect the current market conditions, and those which still bear the legacy of over-renting. For the uninitiated, the latter can seem attractive in the context of an asset’s current lease arrangements, but this can obscure the issue as to whether these terms are sustainable in the long-term.
Auctions have been characterised as a high-yielding investment environment, but the sharpening yields now being achieved in the sale room are notable.
However, investors who are confronted by the minimal – and sometimes volatile – returns currently available in the equities and gilts markets are being attracted by the comparatively high returns that property offers but which for many high-net-worth investors are simply not accessible through traditional property agency channels, which are dominated by global investment funds.
The attraction of commercial property investment will continue for some time. It will create a very favourable market for sellers, with strong competition in the room from a broadening base of investors guided by their wealth managers and independent financial advisers, using our multi-channel marketplace.
Richard Auterac is chairman and auctioneer at Acuitus
