In recent years, it has been the London office market which has, more or less, had a stranglehold on the attention of the international investment community.
According to Cushman & Wakefield, investment in central London’s office market reached £20.5bn last year, only a fraction below the last investment peak in 2007. The huge weight of money flowing into London, predominantly from a broad cross-section of overseas investors, shows no sign of abating over the next two years.
When investing in the UK for the first time, almost all overseas investors will look to London, and, typically, the office market. Familiarity with the City, its global reputation, the cultural and social climate, stability, improving transport infrastructure and market liquidity continue to provide a compelling offer.
However, with demand outstripping supply and yields coming under further pressure, there is talk that the market is becoming overheated and frothy; indeed sharing many similarities with the market in 2006/2007. With pricing being driven by low levels of vacancy, a limited development pipeline and new entrants adding to an increasingly competitive global landscape of investors, will the canny investor start to broaden their horizons?
Diversification is becoming the watchword for the investment community. Tellingly, most of the meetings I and my colleagues had at MIPIM were with international investors seeking to expand their activities beyond their country of origin. And many more of these are increasingly open-minded about the sectors they invest in, so long as they can find/team up with the necessary expertise locally. The UK always features strongly in every discussion and investor target list.
However, discussions are increasingly becoming much broader in scope as the increasing familiarity of the UK market generally, and increased competition for assets in the capital, is creating a greater acceptance of non-London deals. This is clearly good news for our cities and regions, and overall geographical spread of economic prosperity for the country. The stable and growing economy can only help accelerate this trend.
At Hines, we have been proponents of diversification in recent years, having been increasingly active outside London. While offices remain our core hunting ground, we are focusing more time on retail opportunities, particularly on shopping centres, retail and mixed-use developments.
We recently acquired The Centre in Livingston from Land Securities on behalf of HSBC Alternative Investments, our second key regional shopping centre acquisition (and third in total) with this particular capital partner in the past 18 months.
We were positively surprised by the number of overseas banks willing to lend very competitively against this asset. The liquidity of assets in this sector is particularly appealing, with a recent MSCI Colliers International shopping centres investment report illustrating more than £6bn of shopping centre turnover in 2014 and an 18-year average of £3.8bn.
In other sectors, with reliable rental income and, we believe, exponential scope for growth, student housing is becoming an established asset class. The recent Greystar and CPPIB deals, reportedly for more than £600m and £1bn, are testimony to this.
This diversification across both asset class and geographical markets is, in my view, marking an exciting and very interesting time for us all. Investors are moving out of their traditional comfort zones, and are taking a more opportunistic, perhaps riskier approach, when placing their real estate bets. The UK remains a hugely attractive and compelling proposition, but the days of the London office market monopolising investor interest are perhaps gone.
Ross Blair is senior managing director at Hines UK
