Foreign investors have been snapping up commercial property in London in recent years and driving up prices. Residential property has also seen an increase in foreign buyers with many of them rent out the properties which are achieving good rental yields or buy them for the offspring who are studying at universities in the city.
The Global Investor Appetite report by law firm Nabarro LLP shows a remarkably positive outlook for investors targeting London in the next two years. It says that some 73% of investors are seeking to increase the proportion of their exposure to the UK market in the next two years but this drops down significantly to only 45% in the next 10 years and 38% in the next 20 years.
The investment attractiveness of the BRICs, Latin America and South East Asia will increase according to global investors. Western Europe is likely to fall behind in the race with only 49% of investors saying that it has the potential to become more attractive in the next five years.
However, the UK’s status as a stable market was cited by 79% of investors as a key driver for investing. Some 73% said that the perceived liquidity of the real estate market was a key draw, 66% said it was the availability of market data and 62% said it was a strong, transparent legal framework that encourages foreign investment into the UK.
In order to provide a holistic view of the market, Nabarro looked at long term occupational demand which underpins the real estate investment market. The research identified a trend towards longer term leases with occupiers negotiating longer leases in exchange for lower rents.
It says that if as a consequence of this yields fall this may drive yield driven investors to seek higher returns in emerging markets. And although investors are expecting healthy annual yields of 6% in the next five years, they are clear that the expected yields in emerging markets will become more attractive in the long term.
Warning shots were fired by both investors and corporate occupiers about potential legislative changes which would upset the attraction and the UK withdrawing from the European Union was cited as a key deterrent to having operations in the UK by 55% of occupiers whilst 29% of investors felt that the tax regime could be a drawback and 28% said complex planning laws were responsible for less investment coming into the country.
There were more specific concerns from Indian investors relating to the UK tightening its immigration policy. Some 69% of Indians were worried about this and said the felt less confident about both locating their business operations and investing in the UK stock.
This compares with 40% of overall occupiers agreeing that immigration policy could be a deterrent. Concerns about a potential exit from the European Union were also felt most acutely by Indian corporates with 78% raising this as a major concern.
For the German corporates operating out of London this was lower but still stood at 69% and for French occupiers, 58%. There were also concerns raised regarding the UK’s threatened hub airport status among international occupiers, with 69% of German occupiers, 54% of French occupiers and 28% of American occupiers saying this is a deterrent to occupying property in the UK.
‘The message for the UK is simple. The UK is currently in prime position to take advantage of increasing confidence in the real estate sector. The market is viewed as liquid by investors and as a favourable place to locate in the short to medium term by occupiers,’ said Ciaran Carvalho, head of real estate at Nabarro.
‘The real challenge for the UK will be in the longer term. While positive changes are already taking place, the UK government needs to make sure we offer an attractive tax regime, less restrictive planning laws and a sensible immigration policy to ensure a strong development pipeline between now and then if the UK is to stand a chance of fighting off competition for global investment from emerging economies,’ he explained.
‘The UK has a long history of entrepreneurship in the real estate sector and will need to keep reinventing opportunities for occupiers to locate to the UK while also offering the certainty required to make sure global investors continue to prioritise the UK as a home for foreign investment,’ he added.
Inward investment targeting the UK is from a truly global range of investors. Middle Eastern and Asian investors were cited as providing a key source of inward investment by 75% and 73% of investors respectively. This looks set to continue with legislative changes in a number of Far Eastern locations, notably for Chinese insurance companies, expected to lead to a significant outflow of cash. Latin America was cited by 21% as the source of future investment into the UK and Africa by 18%.
When it comes to the specific assets being targeted, the most highly prized are prime office buildings and the research found that 44% of investors are targeting these assets, perhaps explained by overseas markets having a much more established institutionalised private residential rental sector.
Meanwhile retail property has fallen out of favour with only 24% citing it as attractive, although it is clear there is a place for well managed stock with more of a leisure angle.
Structural changes in the banking sector have had a knock on effect when it comes to investors financing their appetite for UK real estate. There is a clear move to alternative finance and funding of real estate projects through non bank institutions with 67% investors believing insurance companies will become a significant source of funding.
The study also points to a return to favour for Commercial Mortgage Backed Securities (CMBS) with 31% believing this will become an increasingly prominent source of finance in the medium term.