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The UK’s commercial property market recaptured the attention of investors in 2013. Although London has been the darling of global property investors for some time, the regional market had been largely moribund since 2007.
In the past year, yields on the best regional properties – which move inversely with prices – have fallen as value-conscious investors have looked to the potential outside the capital.
“Overseas money has been pouring into London for several years,” says Hugh White, head of national investment at BNP Paribas Real Estate, part of the French bank.
“Pricing [of yields] has now crunched down to such a level that investors are being forced to consider other options.”
At 8.96 per cent, average commercial yields outside London last year remained well above those in the capital (5.81 per cent), according to Savills, the estate agent.
Retail and industrial were the most popular subsectors, with offices in third place, Savills says.
The push into the regions is creating an increasingly competitive mood among investors. James Gulliford, joint head of UK investment at Savills, says his clients have seen potential buyers gazumping each other in the rush to secure deals – the first time this has happened.
“The momentum has been there for six months or so, and it is just coming through into the deals that are now being reported,” he says.
But investors are not a homogenous group. The yields, timeframes, potential risks and scale they are seeking differ wildly.
The regional recovery began with opportunistic investors such as private equity firms and hedge funds looking to acquire bargains that had been marked down by distressed owners who needed quick sales.
“A lot of the money that has come in during the past year was private equity money raised in 2008-09, earlier in the cycle,” says Mat Oakley, director of commercial research at Savills.
As the initial opportunities ran out, these buyers have more recently shifted into riskier, lower-quality properties with shorter outstanding leases that offered scope for refurbishment and could be sold on to more cautious buyers.
A good example was the purchase for £245m by Oaktree Capital Management, the US private equity group (in a joint venture with German property company Patrizia), of the IQ Winnersh business park in Reading from property investor Segro in July.
Some of the biggest investors are here to stay, though. By far the largest buyers in the regions were UK-based institutions, which generated 39 per cent of all deals, according to CBRE, the property advisory group. They too are becoming more open to risk, as seen in their increasing willingness to invest in higher-yielding industrial properties, Mr White at BNP Paribas says.
The second-largest group was overseas buyers, who were behind nearly a quarter of transactions. Of those investors, one-third were from Asia. They include Malaysia’s Lembanga Tabung Haji, which bought Unilever’s headquarters in Leatherhead, Surrey, for £76m from LondonMetric in December.
A further 20 per cent of overseas buyers were from the Middle East. The remainder were split between the US, Germany and other European countries.
Geographically, the largest slice of investment outside London went to its periphery – a quarter of all non-London money went to southeast England, CBRE data show. The rest of the cash was spread among the other regions, with Scotland attracting 11 per cent.
Mr White identifies a first phase of investment, which is now well advanced, going primarily into offices in the Thames valley and pockets of southeast England.
The second phase, which he says will gain momentum in the coming months, is going into large retail distribution warehouses let to high-quality tenants such as Tesco, the supermarket chain. This second phase is focused on the largest regional cities, Mr White adds.
And the next sign to watch out for in the UK’s regional commercial property recovery? Speculative development.
Very little has been built for more than half a decade, meaning that as the economy improves, occupiers wishing to expand face a shortage of options. This creates opportunities for investors that are willing to take the risk of finding an occupier once development is under way.
“We are probably not far away from speculative development becoming a goer in the major UK regional cities,” Mr Gulliford says.
“Later this year or in 2015 we are likely to see a patchy recovery in development outside London – probably driven by the major Reits [real estate investment trusts].”