As the London commercial property market reaches boiling point many foreign investors are buying privately to avoid competitive bidding or funding the construction of office blocks from scratch — forcing British investors to make their money from regional opportunities.
Last year, insurers and sovereign wealth and pension funds invested more than £55bn in commercial property across Britain. A high proportion of that cash originated in Russia, China and southern Europe were managers view the UK as a safe haven in the aftermath of the financial crisis.
“With London the principal target for foreign capital, British investors are seeking rising rents in cities such as Glasgow, Leeds and Manchester as the economic recovery takes hold,” explained Chris Perkins, head of M & G Real Estate’s business and industrial property team. “There are some markets in the UK, particularly prime core London, which we see as fully priced.”
And recent research from agents Savills shows that British institutions increased exposure to the regional office market by 46 per cent during the first nine months of 2014. The previous year’s rise was just 33 per cent.
Among the most active of the British-based investors, M & G signed the largest regional deal of the year, spending around £320m on 500,000 sq ft of Manchester office space. Of the £3bn it spent acquiring UK property last year, 60 per cent was invested outside London.
Many domestic fund managers turning their backs on the capital are now also directly approaching local councils and businesses that may need to sell off assets, as well as retailers and others open to leasing back their property to free up cash.
“We spend a lot of time seeking off-market transactions where we don’t have to be in competitive bidding,” said Bill Hughes, head of property at Legal & General Investment Management. “That is where you get the best value.”
He explained that after improving a building — with a view to holding it for an average of seven to 10 years — his company could then sell it on as a performing asset to another long-term holder, such as a pension scheme or sovereign wealth fund.
But while overseas money continues to concentrate on London foreign investors will, in time, begin to look elsewhere. “Although global funds are likely to follow the path forged by local rivals, the incumbents should enjoy their advantage for some time yet,” said Michael Haddock, senior research director at CBRE.
“In theory almost any investor might be interested in smaller markets,” he added. “However, because it is harder to place large amounts in smaller cities quickly, some of the larger international investors that have large amounts to invest and limited management capacity might find them impractical.”
All three experts did, however, predict an increasing fall in commercial transactions for the first four months of 2015. Political uncertainty about who will win the May General Election is expected to crimp demand in the early part of the year, but any slowdown in overseas interest would be temporary, they said.
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