Several years ago every other article on the market tried to identify the shape of the recession, with the most popular among doom-mongers being an ‘L’. As it has turned out so far, the best letter is a ‘U’.
Vertiginous on the way down, a long bottom and then vertiginous on the way up.
But suddenly, once again we find ourselves with no clear direction. Market indicators are all over the place. Was a “U” shape too early a call and are we heading for a “W” after all? Whilst I doubt it, the ride is starting to feel a bit like cycling around a velodrome track made of corrugated iron. The sheer weight of capital is ensuring momentum is maintained and, for those with funds to invest, they daren’t slow down for fear of performance falling off. After a strong October, raising $17bn (£11bn), the year-to-date total for private equity real estate capital raising is $140bn. That is the second largest on record and the UK seems to be absorbing more than its fair share. The alternative of holding cash remains an unattractive prospect, with expectations of increases in interest rates being pushed out further as inflation undershoots the Bank of England target as the impact of quantitative easing continues to be felt.
The wide margins over gilts, and good cash on cash returns, position property as an attractive asset class.
With so much capital having been directed towards London over the last few years, the positive knock-on impact is now being felt in major regional cities and even more “fringe” locations. Owing to the pricing, London has become predominantly the hunting ground for trophy buyers and some specialists and developers. But where does that leave other investors? Market recovery can no longer be built into business plans to make the numbers stack up. That leaves two routes.
For shorter-term private equity-style capital, deals have to be opportunistic, possibly with operational turnaround or development angles, if they are to achieve their double-digit return targets and 2x cash multiples.
For the rest, it is worthwhile reflecting on the mega-trends when making investment decisions:
● Urbanisation – migration into cities is a worldwide phenomenon. In the UK, with our restricted land supply, we will witness the rising population density of our major cities. Prices around transport nodes will therefore increase and, over the next decade, Crossrail and HS2 will result in pricing tectonics as demand rises around hubs.
● Lifestyle – major lifestyle changes are being driven by demand for social and leisure facilities and advancing technology. Shopping is no longer a destination in its own right (except designer led). We want to socialise and be entertained. Hence the unending shift away from the high street and towards quality shopping centres, which not even Mary Portas has been able to abate. The only high streets that buck this trend are those where owners are being more creative about bringing in other uses. Because of our social nature, however, we are not seeing technology relegate offices to a thing of the past; in fact, generations coming through are being ever more demanding about the quality of offices despite changing practices, with more flexible working patterns and hot desking, reducing average sq ft per worker.
Technology is, however, having a huge impact on the need for infrastructure, with ever-increasing requirements for speed and the transfer of exponentially growing amounts of data.
● Demographics – an ageing population, with the division of wealth moving ever further towards that segment. Over the longer term, this will create a significant demand for healthcare and age-related accommodation, with substantial value at the premium end of the spectrum. The trends above also apply. We are seeing older people wanting to move to good-quality accommodation, in towns, so that they can more easily access social and leisure activities. There is the extra dimension as they plan for their future, of accessing fit-for-purpose housing where increasing care needs can be met. Ownership requirements are likely to change, with rental and annuity products becoming more popular to allow for equity release.
So, if you want to ensure you aren’t caught in an endless corrugated track and yet can’t afford to miss out on the positive yield gap, developing long-term, future-proof accommodation that addresses the changing social trends is not a bad place to start.
Rebecca Worthington is chief executive of Lodestone Capital
