Return of the funds Cash-rich institutions are chasing opportunities in parts of Surrey, squeezing yields sharply as a result. Nadia Elghamry reports
One percentage point and shrinking. That’s how fast one part of the Surrey market has moved in just nine months. Back in March last year, Durngate Property Group sold the Gateway office scheme in Guildford, bagging itself a 8.25-8.5% yield.
At the time, with many agents saying they felt they were standing on a precipice and transactions all but grinding to a halt, the company probably breathed a sigh of relief and hoped for better times ahead.
Little did it know that, just nine months later, the building would be sold at a yield thought to be in the region of 7.25%. It was just one example of how tightly the market had contracted in the space of just a few months.
Nigel Wadham, of Wadham & Isherwood in Guildford, says that most of the UK funds have a surplus of cash.
As they return to the buying scene, there is massive pressure on yields in Surrey for well-let stock with secure income. “We are certainly seeing a lot of funds buying back stuff that they’ve sold a couple of years ago, and paying a lot more for it,” he says.
Wadham says that, back at the start of 2009, when Gateway was first on the market, “there wasn’t a lot of interest in it. Since then, however, the market’s moved on a lot.”
Just how far became apparent in November when PRUPIM penned the biggest deal of 2009, selling Procter & Gamble’s headquarters at The Heights in Weybridge for £31.6m to Kuwaiti investment firm Gatehouse Bank.
At the start of the sales process, Jones Lang LaSalle, which acted for the vendor, said the market was uneasy but, in the end, the building was subject to a hotly fought contest (see box).
A few days later, Aviva pulled the sale of almost £1bn worth of stock, including the sale of a 50% stake in its Bentall shopping centre in Kingston upon Thames.
The fund cited an inflow of cash and a change in sentiment in the investment market as reasons for putting the brakes on.
Well-let, solid-income stock has been the target for many investors but, even away from the trophy buildings, there is a race on to bag assets.
As an example, Wadham points to an industrial unit in Cranleigh. “It’s a tiny village with poor communications, but the unit went to best bids and eventually went for 6.5%,” he says. “Even in the prime of the market, it would have struggled to get that.”
Such competition is not the sign of a healthy, robust market. Stock is tight, and Wadham says the shortage of properties is so acute that investors are struggling to find buys in Surrey and are, as a result, heading further afield.
“Investors want long-term leases and, if that’s in, say, Bolton, they’ll go there. They might prefer Guildford, but people are being led by the lease lengths,” he says.
Mark Routledge, director of national investment at JLL, says £800m worth of transactions were completed in the western corridor last year, and he expects a similar amount this year.
He adds that yields are tightening, although the market will not see as much compression this year. There will probably be some hardening of rents, however. He adds that a brand-new building with a 20-year lease “would sell for 6.25%. If it was brand new and rack-rented, you’d get 6.25%.”
But Routledge says that, while investors are after 15 years of income, “we are not getting tenants committing to those leases, and take-up is down considerably. The bottom line is that buyers will have to compromise.”
There is a feeling in some quarters that this is already happening. Simon Rickards at Knight Frank says: “People’s definition of prime has broadened. People were saying prime had to be 10 years in the middle of a town or 15 years on a good business park let to a good tenant. Now, it is five years on a good business park or reasonable town centre. The definition has widened.”
This is not a return to the heady days of the boom. But the market may yet see a good few investors having to swallow keener yields to get back into the market.
Procter & Gamble’s The Heights: deal under a microscope
When PRUPIM put Procter & Gamble’s The Heights headquarters in Weybridge up for sale last summer, Mark Routledge, director of national investment at Jones Lang LaSalle, says the UK funds had yet to step back into the market, and the resurgence in investment that marked the end of the year had yet to gather steam.
In the end, it took five months to sell the 109,000 sq ft building, and Routledge describes the relief, rather than excitement, when it finally went through.
The Heights attracted five serious bidders and went to two rounds of best bids, finally selling to a new fund backed by Middle Eastern money for £31.5m, representing an 8% yield.
But this caused its own problems. “There were a lot of names coming forward that we hadn’t heard of before,” he says. “How do you assess them? Normally, when someone comes forward, a note goes round internally to ask if anyone has dealt with them before. We weren’t saying their money wasn’t good, but we just didn’t know them.”
The deal was partially financed with £19.7m of Sharia-compliant funding.
If The Heights, a fairly new building, rack-rented with a secure, long-term income from a respected household name, came to market today, Routledge believes a UK fund would snap it up and the yield would be a good deal keener.
“When the property was put on the market, 8% would have been a stretch,” says Routledge. “If it was in today’s market, it would have been at least 50 basis points keener.”
