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The war of words being played out by politicians and economists over the UK housing market offers a concise explanation of the biggest issue facing the country’s commercial property market.

For those looking at London, the country is in an unsustainable housing bubble, fuelled by the deep cash reserves of overseas investors. For everyone else, the market is as placid as it has been for the past five years.

In the office, industrial and retail property markets, which form the backbone of many institutional investment funds, the trend is identical.

London has pulled away from the rest of the country in terms of value and rental demand. So much so, that trying to analyse the national market with London at its head increasingly obscures, more than clarifies, the reality.

Statistics do not always provide a clear indication of fact. Yet there is one fact that highlights the predominance of London’s property market: last year foreign investors spent more money on the city’s real estate than they did in any other European country – and more than three times the amount invested in the UK excluding London.

But just as the economic slowdown caused by the financial crisis created a stark divide between London and the rest of the country, so the story of the rebound is one of increasing fragmentation.

“The game has changed – the success now is coming from choosing the right [properties] in the right places, rather than taking some sort of broad investment philosophy and trying to deploy a large amount of capital,” says a principal at a leading private equity fund.

The argument has been underscored by the recovery of certain sectors, such as warehouse property, which have been coveted by investors for the prospect of high rental yields. Similarly, demand has returned for out-of-town shopping centres, reflecting expectations that consumer trends will be geared more towards large malls and away from high streets.

Overall, however, the picture is still bleak for most commercial property located outside London, the southeast of England and a few larger city centres.

During the past 18 months, rental growth across the UK commercial property market has been flat, according to CBRE, the property consultancy. Meanwhile, capital values have declined moderately during the same period.

Hans Vrensen, global head of research at DTZ, the property consultancy, says: “It is not any more a question of London and everywhere else: there are opportunities emerging in different parts of the UK, but it is very asset- and location-specific.

“There are pockets of demand, especially from those investors for whom London has become too competitive, but they tend to be focused on single assets or small portfolio deals. A lot of parts of the country are still seeing very little interest in terms of new investment.”

The fragmented market has presented opportunities to the more nimble investors, who can deploy small amounts of capital and take on more risk than the institutional investors, such as pension funds, which have traditionally dominated the property market.

Private equity funds, in particular, have taken advantage of some of the opportunities outside London. For example, Blackstone of the US has been among the most active investors in the industrial sub-sector, creating a specialist logistics and warehouse property business.

Arguably the largest single structural change to the UK commercial property market during the past decade has been changes in the debt market.

Banks, traditionally the main sources of capital for the industry, have been pulling back their lending to property companies. The resulting gap has drawn in new debt providers, including some of Europe’s largest life assurers. The likes of Legal & General, Axa and Generali have all increased their lending to property business as a way of getting exposure to the asset class.

Perhaps the worst affected area of the UK property market has been the high street. A string of high-profile retailer failures and continuing low levels of consumer confidence has wrought destruction on town centre shopping districts. One of the main issues facing the high street is that the properties tend to be owned by multiple landlords, impeding the route to a single solution.

“Property owners range from major institutions, to private equity groups with multiple investors in their finite-life funds, to families, charities and private individuals,” says Stephen Barter, head of property at KPMG, the consultancy. “Each has a different ownership and investment rationale, different time horizons, different ways of making decisions, and different management behaviours.”

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