If, as anticipated, volumes in the fourth quarter of 2015 follow the patterns observed in the final quarters of 2013 and 2014, investment in the UK commercial market this year will break the £70 billion barrier for the first time.
According to international real estate advisor Savills it is the strong confidence in the market that is the driving force behind the growth in activity. Its latest report says that despite ongoing uncertainty over Greece’s position in the Eurozone and a slowdown in the Chinese economy, UK property as an asset class continues to outperform investor expectations.
Average prime yields have remained at 4.65% for the second successive month, however resurgent retail activity and strong UK institutional interest in south east offices could exert downward pressure on yields in these sectors, the report warns.
‘Last year 59% of investment activity in UK property took place outside London, a trend that is set to continue as investors seek the value afforded by the rental growth prospects in supply constrained regional markets, alongside the opportunity to build scale by acquiring portfolios,’ said Kevin Mofid, research director at Savills .
‘However, regional markets can be more susceptible to Government policy changes than the capital. Investors should therefore consider the potential impact that the extension of commercial to residential permitted development rights could have on rental growth and vacancy rates in regional office and industrial markets,’ he explained.
‘Nonetheless, given that investors currently place UK property head and shoulders above other asset classes, we don’t envisage that these measures will materially affect investment activity going into 2016,’ he added.
A separate report from Savills says that non-domestic real estate investment outside of London will reach a record high by the end of 2015 with some £10.5 billion invested in real estate outside the capital by international investors in the first eight months of 2015.
Savills predicts that this will rise to £14 billion by the end of 2015, the highest volume since it started collecting data in 2000, and nearly half of all the non-domestic investment in the UK as a whole.
In the 12 months to August 2015, portfolio purchases accounted for the majority, 64%, of investments, due to the preference of investors for larger lots which are less common outside of London.
Scotland and the South East proved to be the most popular regions, each attracting a 7% share of investment, with the North West and West Midlands in joint second place attracting a 5% share each due to the strong rental growth projections for the Manchester and Birmingham office markets, as well as the comparatively high yields on offer.
The most popular sector for investment is retail and leisure, accounting for 57% of investment, driven by several large transactions and the sale of some large hotel and retail portfolios. Offices and industrial property were second and third, accounting for a 17% and 16% share of investment respectively.
The report also says that international investment has been dominated by North American investors who accounted for 57% of non-domestic purchases outside of London, compared to 12% from Europe and 6% from the Far East.
‘By the end of 2015, non-domestic investment in real estate outside of London will equal the volumes we saw in 2009, 2010, 2011 and 2012 combined, easily reaching a 15 year high and beating by approximately £2.6 billion 2014, the previous record breaking year,’ said Mat Oakley, head of commercial research at Savills.
According to Richard Merryweather, joint head of UK investment at Savills, some of the investors who are active outside London are quite opportunistic players, attracted to the regions rather than the capital by the higher yields and growth prospects, as well as the opportunity to add value by acquiring portfolios.
‘We expect this trend to continue into 2016, as it is clear that non-domestic investors are becoming increasingly familiar and comfortable with markets outside London,’ he added.
