UK investment: the kitchen just gets hotter
It’s often said "if you can’t stand the heat…", but for investors in the UK property market, it’s a question of not just being able to stand the temperature, but to read where the heat is coming from and how hot it will be when it gets to you.
For those who fail to find the returns they are looking for in London, the UK’s regional cities are of increasing interest to both domestic and international investors.
“We’re continuing to see UK property perform phenomenally,” says Stephen Marks, an investment specialist partner at Trowers & Hamlins, noting record rents of £185 per sq ft in ‘safe haven’ London recently, “but investors are needing to track an increasing number of variables at extremes we’ve never seen before.”
Marks points not just to UK deal volumes hitting a 20-year high, but active money closing deals on a very different basis to the traditional UK investor. “We’re seeing yields in the West End as low as 2.5%,” he says, “which a lot of people said could and would never happen. But if you look at investors out of Asia, they’re quite happy to deal at that level, and that’s making things very interesting for more traditional Western investors who are accustomed to much higher yields.”
"If you add in other new phenomena, such as ‘money-boxes-in-the-sky’ – foreign investors buying central London flats and just leaving them empty – there are a lot of distorting effects on UK property right now.”
With the focus on devolution and increasing investment in cities such as Manchester and Birmingham, there are opportunities for developers and investors across commercial, residential as well industrial, logistics and infrastructure.
Partner and residential specialist Jeremy Hunt observes that “institutional investment is flowing through into new and varied areas of real estate – for example, we have helped Aviva Investors REaLM Social Housing Fund to invest over £150m into affordable housing over the last few years – showing the strong trend we are seeing of large pension funds looking to different kinds of residential property to diversify their portfolios and provide a good match for investors income requirements.”
Rebecca Wardle, one of Trowers & Hamlins’ development specialist partners, with a particular focus on residential, explains that the growth of the UK’s private rented sector (PRS) – which is now worth five times the country’s commercial property estate – is broadening investment choices, but complicating the picture.
“Student accommodation is a good example of an alternative investment which has for some time been considered a safe bet, delivering good yields and a pretty guaranteed income,” she says, “but right now, the government is relaxing the rules for residential developers to try to ease the housing crisis, so relatively affluent young people in work who choose to rent are providing investors a very attractive alternative: higher-spec units with better rental yields, often in mixed-use developments with exciting commercial possibilities.”
Tim Nye, corporate and private equity specialist, comments that “Investors looking for high yields are increasingly attracted to perceived riskier sectors such as healthcare, including senior living. It used to be a niche sector but increasing competition for the best assets, as well as new entrants into the market, has seen prices steadily rising and overseas investors, particularly US REITS, very active.
“In London and the South East particularly, there is an increase in self-pay customers seeking luxury properties, where five-star hotel type amenities are available. Investors looking to invest in and build such properties and then enter into long-term operating contracts to outsource the provision of care and support are able to position themselves to take advantage of the ageing population and a shift towards a model of retirement care more like that seen in the US. These long lease type arrangements for investors offer greater certainty against other commercial properties where leases can be shorter,” he adds.
Stephen Marks agrees investors need to keep a close eye on what government is doing.
"We've seen a number of interventions in the UK housing market in recent years,” he says, “which in turn has a major impact on local authorities, especially where mixed-use development is concerned. Investors need to keep an eye in every direction at the same time to make sure they’re not just getting the best yields, but that they are in investments they can get out of when they need to.”
Lawyers need to be equally agile. “Investors want to know what can be done and how it can be done,” says Marks. “And that means we need to understand what is possible, what is likely and what is going to work best – and quickly.”
"The landscape is definitely more complex for investors,” adds Rebecca Wardle. “In some ways it’s never been more important to know how, when and where to deploy your capital to best effect.”