Investment pattern changes are transforming the UK property market.
The Financial Times 8th Annual Property Summit took place at London’s Mandarin Oriental Hotel on 2 December, the day before the Chancellor’s pre-election Autumn Statement, and provided a fascinating insight into the UK property market. It was ideally timed to take the pulse of an industry that is currently attracting a flood of investment, in part, due to the relative stability and strength of the UK economy - particularly when compared to the Eurozone.
As the Chancellor’s statement confirmed the following day, the UK economy is expected to grow by three percent in 2014. Against this backdrop, we are seeing higher valuations in the commercial property sector – particularly in London – while residential prices have also been rising. However, the current cautious optimism in the property sector is tempered by awareness of uncertainty in the wider economy. In the face of weak international demand, the UK’s current rate of economic growth seems unsustainable and any deceleration must surely have a negative impact on the overall property market. The prospect of a correction was keenly debated at the Summit, although fears of a sharp downturn were generally muted.
A seismic shift
Over the past few years we’ve seen a seismic shift in the pattern of overseas investment in London. In particular, we’ve seen much greater levels of activity by sovereign wealth funds and Superfunds, which seek to spread their risk, receive higher returns and take advantage of new opportunities. In some cases, this diversification is fuelled by deregulation of overseas investment in home jurisdictions and by fiscal rules that encourage companies to remain invested abroad, rather than repatriating funds that will be taxed at high rates.
In the 12 months to 20 November 2013 cross-border real estate investment into London totalled £14 billion, according to figures from Real Capital Analytics. That figure rose to more than £20 billion this year. The biggest source of investment was the US, although Singapore, China, Kuwait, Norway, and Brazil were also significant players. This is in sharp contrast to 2007, when Ireland, Spain and Germany were the main investors after the US.
However, London is not the sole beneficiary of increased investment. Funds are also flowing to Germany, France, parts of Scandinavia and, increasingly, Spain. But London remains hugely attractive. The buoyancy of the capital’s economy, its status as a world city and Europe’s pre-eminent financial centre, and it’s position outside the Eurozone are hugely important factors. The UK’s political stability and transparent legal system are also playing a part - as Radim Rimanek, Director of European commercial property group HB Reavis, observed during the Summit’s ‘New Kids on the Block’ panel: London is open to capital.
A changing landscape
So what do these shifting investment patterns mean for London property? In my view, the arrival of sovereign wealth funds and Superfunds is transforming the landscape, not least because of their focus and timelines. These new players favour sizeable investment opportunities in prime locations and they tend to invest for the long term.
There are two immediate outcomes. Firstly, the financial firepower of these institutional investors means that other funds are less able to compete for high-value prime locations. Secondly, by holding their assets over the long term for income, they are effectively reducing the opportunities for other investors to buy into the higher end of the London market.
What we are seeing now is a recalibration of the investment landscape as both international and British investors look for new opportunities beyond the capital’s prime locations – for example, emerging asset classes. During the Summit we heard about the blossoming of the student accommodation market (driven by widening access to universities), the development of the property rental services sector, and the growing scope for partnerships between the public and private sector to develop new sites - such as the National Grid’s partnership with Berkeley Group to regenerate the land around gas reservoirs.
In this respect shortage of stock is pushing investors up the risk curve. For instance, those who are unable to access completed projects at affordable rates may move into inherently riskier development projects, for some this will be unfamiliar territory. What we are seeing is a greater need for partners and advisers with expert knowledge of those opportunity sectors.
The upside here is a flow of funds to new projects and partnerships, driven largely by new players. To some extent the long term success of these projects, and therefore London’s real estate market, will be determined by the alignment and duration of these new relationships.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.