In the field of yields, Glasgow lives up to the meaning of its name as a “dear green place”. But investors still see it as riskier than London. Adrian Morrison learns why
Glasgow’s first-quarter investment sprint, topped by ING’s purchase of 180 West George Street in April for a Skandia property unit trust,pushed capital values up by 55% from those seen at the depth of the crisis. At their nadir in 2009, prices had crashed by 40%.
Since Q1, the growth in the city’s investment market has slowed to a passive amble. Several retail funds – the dominant players in the bounce – euphemistically describe their current position as “more selective”. There have been no recent or prime transactions, pointing to a prolonged absence of retail funds from the picture.
If such a major component of the investment market cannot be sated, who does have the appetite and money? And how can cautious buyers be woken from their risk-shy slumber?
Whomever you talk to, there is consensus that a weight of money is desperately trying to find a home. Virginia Beckett, CB Richard Ellis’s director of capital markets, points out: “The level of appetite from different investors is not necessarily matched by what the market can deliver.”
But the retail funds’ retrenchment is not merely about a lack of the right sort of stock. After the redemption scares of 2009, many retail funds – run by the likes of Royal London Asset Management, Prudential and Scottish Widows Investment Partnership – downgraded their exposure to property.
Private equity and foreign funds have a bit more flexibility, though, and they are making their presence felt in Glasgow.
The Germans have continued their search for value in Scotland’s largest city over the past 18 months but have been particularly conspicuous recently. At the end of October, German institution SEB completed the purchase of the 94,000 sq ft 110 St Vincent Street, which will be occupied for the next 12 years by HBOS.
SEB is understood to have given Scarborough Group a sum at the lower end of the £40m-£46m quoting price, reflecting a yield of 6%.
Earlier this month, German fund manager Union Investment purchased the 64,000 sq ft Equinox Building on Cadogan Street from Chinese investor Adrian Fu, for more than £28m – a yield of 5.8%. The investor regeared the lease of Peter Wood’s insurance operation, Esure, to 20 years with one minimal uplift, securing long-term income and guaranteed rental growth for one of its open-ended property funds.
The euro has strengthened by more than 25% against sterling in the past three years, approaching parity at the end of 2008 and providing an incentive for German investors, who buy sterling to complete UK purchases.
Equally, they are less concerned about the effect of public sector cuts than British institutions are. “The UK funds are negatively disposed to the regions because they feel that they will be hit by public sector cuts,” says David Davidson, capital markets partner at Cushman & Wakefield. “German funds understand that London is a safe haven, but also that it is the most expensive.”
However, they have shied away from anything with letting risk, preferring long-term income to development risk. Indeed, UK funds are more willing to get involved in active management opportunities owing to the fact that the Glasgow development pipeline has all but stalled (see Development, p108).
This is epitomised by Moorfield’s recent sub-£55m purchase of Paradigm RE Managers’ 600,000 sq ft Skypark complex – west of the city centre, just off the M8. The fund manager has teamed up with Glasgow-based Resonance Capital to deliver growth for its MREF II private equity fund, essentially by rolling up its sleeves and capitalising on a 330,000 sq ft extension consent.
Adam Coffer, managing director of the £30m private equity fund EPF Group, scooped the Darnley Retail Park in south-west Glasgow earlier this year in the face of local and Irish competition. The £5m paid was bullish, but the opportunity to buy an adjacent 1-acre site was too alluring, given the yield differential between London and Glasgow.
Less competition
“Yields are attractive in Glasgow – 100 basis points lower than in London, with asset management opportunities and less competition. It was a no-brainer,” says Coffer.
But Glasgow is not London, particularly in investors’ eyes. To account for the higher perceived risk, vendors have been incentivising sales using fixed uplifts.
Buildings such as 110 St Vincent Street and Equinox are undoubtedly strong products, but they are not universally attractive to investors, being neither new nor, in Esure’s case, AAA covenants.
“Yields have been the attraction for investors to Glasgow,” says Drivers Jonas Deloitte partner Alasdair Ramsey. “But to invest in the regions, many want fixed uplifts.” This is despite the prospect of supply-driven office rent growth in the next 12 months.
“What happens next for the investment market?” asks Davidson. “The test will be our efforts to persuade investors of the case to speculatively develop offices.”
Secondary market in need of funds to avoid stagnation
In recent months, the gap between Glasgow’s prime and non-prime markets has polarised. Investment agents are finding that shifting well-appointed stock with good covenants, but in secondary locations, is nigh impossible.
“Last year, the market for secondary moved out two points and will probably move another two,” says Bill Binnie, Lambert Smith Hampton’s head of investment in Scotland.
He is marketing a 13,000 sq ft office in Hamilton, south-east of Glasgow, which ticks all the boxes in terms of lot size, quality and covenant. “Because it is in Hamilton”, Binnie adds, “purchasers want a discount in yield to reflect that.”
Although the market is ripe for entrepreneurial bargain hunters, many agents say that it could stagnate if there is not an adjustment to how secondary and tertiary investments are funded.
“There may need to be joint ventures, but things need to be looked at differently and innovatively to bridge that gap,” says Virginia Beckett, director of capital markets at CB Richard Ellis, adding that private equity funds might be a solution.
