International investment in UK real estate has once again hit peak levels, with London commercial real estate increasingly attractive to overseas investors eyeing up an improving occupier market.
As recently reported by CBRE, 69% of London office investment in 2014 was made by overseas investors, with cash-rich buyers from North America and Asia flooding in. In fact, we ourselves are seeing increased appetite from investors in the likes of Australia, South Africa and mainland Europe who are looking to funds like us to invest on their behalf.
As such, UK investors are looking elsewhere in the UK for favourable returns. This is in part due to the increased competition from overseas investors, but it is also due to increased recognition of the potential that the UK’s regions hold for commercial real estate. Indeed, Savills has forecast that in 2015 regional property portfolios will deliver a gross yield of 7.7%, whilst London portfolios will deliver a less satisfying yield of 4.3%. This data reflects what we have observed in our own portfolios, and we expect this trend to continue as investors reach further along the risk/return line in search of better yield.
Investment in the regions makes sense not only from an investment perspective but also from a business perspective. With London office rental prices high, digital advances making “location, location, location” an increasingly insignificant factor, and improved infrastructure in the regions making these spots easier to operate from, it has now become unnecessary for businesses to stay in the UK’s capital.
The government did once nurture the idea of a London ‘Tech City’, but unfortunately this has not taken off as planned. Instead, tech businesses have all set their sights on more practical locations such as the South East, or Northern cities such as Manchester and Birmingham. One trend that we have observed is the rise in investment activity in London-fringe locations such as Gatwick or Thames Valley, as businesses move out of the centre of London, and “the ripple effect” takes hold.
Taking the political view, George Osborne’s most recent budget will also have helped to promote commercial regionalisation further, with new “enterprise zones” being created in Plymouth and Blackpool, tax breaks on certain businesses, and capital being set aside to invest in new tech incubators in non-London locations such as Sheffield, Leeds and Manchester. The Chancellor’s budget also championed the concept of devolution, with a provisional new agreement to allow cities such as Greater Manchester to keep 100% of business rates, a change which will enable them to feather their nests, improve their infrastructure and make themselves
attractive locations for businesses to operate from.
We firmly believe that devolution will go further than the most recent Budget; further even than the general election. It is a concept that has been a long time in the pipeline, and now that it’s here we’ll begin to finally see the commercialisation of the regions. While in the past the popularity of regional investment may have ebbed and flowed with the rise and fall of the real estate market, it now looks like regional investment is here to stay.
At Clearbell, we are investing in this regional growth, with the recent additions of sites in Gatwick and Bracknell to our South East office portfolio and an office building near Hanger Lane, West London, serving as examples. Our ethos is to look past the norm and to pick up on lesser known trends that have strong potential for growth. As such,
we will continue to look towards all four corners of the UK to find the best regional nuggets that will provide attractive returns for our investors
Manish Chande is a senior partner at Clearbell Capital