Opportunities in the UK retail property markets
The United Kingdom is a globally competitive economy that has successfully transitioned into a business and financial services orientation. It is the world’s fourth largest economy, driven in significant part by its globally-oriented banking, insurance and business services sectors. The labour market is flexible and efficient, especially compared with other European countries. The regulatory environment has become progressively less restrictive, encouraging investment and innovation. E-commerce and related technology companies are now as important to the economy as many basic industries.
economic growth is strong and steady
London is the financial services capital of Europe, with a significant presence of every major investment bank in the world. Indeed, London’s economy is nearly as oriented to exporting services to the rest of the world as it is to domestic services. Other major metropolitan areas have rapidly adapted to 21st century needs, including Birmingham (financial services, telecommunications), Manchester (business services, public administration), Leeds (banking and insurance, legal) and Bristol (financial services, information technology). Regional economies have generally exhibited steadier - albeit somewhat slower - growth in the past decade than Greater London, reflecting their more domestic orientation.
The United Kingdom’s significant structural strengths have facilitated strong and steady economic performance. Gross domestic product per capita - an indicator of wealth and productivity - has been growing at the fastest rate of any G-7 economy since 1990. The bursting of the information technology bubble in the United States at the start of the decade only slowed - rather than reversed - output and employment growth. Inflation is stable at historically low levels. The current unemployment rate of 4.7% - half the rate of 10 years ago - is the lowest of the G-7 countries.
government policies favour property
Strict development controls provide investors with the ability to predict future supply, making value-added improvements to existing properties viable. Suburban development is generally discouraged, and new out-of-town projects are nearly impossible to get through the approval process. At the same time, new and redevelopment projects located in central areas - especially those with mixed-use components - are actively encouraged by the planning regime. This makes it easier to predict future demand, and puts upward pressure on rental rates for retail, office and industrial properties.
property markets are generally
Commercial property returns have reflected the economy’s stable growth. Over the past 10 years, returns have been positive in every year with far lower year-to-year volatility than in the 20 years prior. Property remains the top performing asset class - versus stocks, bonds and fixed income - on a three, five and 10 year basis. Office rental rates in regional markets have stabilised at their 2000 peaks, with only a few areas hard hit by the technology downturn. Retail rents are growing, bolstered by a strong consumer sector. Industrial demand is perking up again just as development slows, and rents are stable.
…and the office market is poised for
recovery in london
The London office market has historically been one of the most volatile property sectors, both in terms of property fundamentals and investment returns. The period since the late 1990s has been no exception; the technology and financial services that fuelled the boom in Greater London prior to 2000 came to an abrupt halt in 2001, and in Central London effective rents are more than 30% below their peaks. The office market is now bottoming out, and will reward investors willing to assume leasing risk as occupancies improve and rents rise.
residential land shortages create
Recent government policy changes encourage development in general - and homebuilding in particular - on brownfield land converted from commercial uses. This refocused policy presents opportunities for the repositioning of commercial properties to residential uses. In particular, this presents opportunities to convert industrial properties, as residential land is more valuable than industrial land in every region in the UK; the gap is particularly wide in London and the South East. This creates arbitrage opportunities for investors that can acquire and repackage industrial parcels for sale to residential developers.
value-added opportunities in the uk TODAY
Today’s real estate environment in the UK is remarkably healthy, which has both positive and negative implications for value-added investors. Acquisition competition is intense for quality properties, making it challenging to realise outsized returns by investing in ‘plain vanilla’ properties. On the positive side, however, healthy tenant demand and voracious interest from investors for well leased, Grade A properties, make effective redevelopment and repositioning strategies possible. The following value-added opportunities are present in the UK today.
n The South east’s office market has been weak
compared with the rest of the UK but still more stable than London since 2000. Strong demographics and stringent supply constraints will reward strategies that focus on refurbishing Grade B or C buildings, especially in prime town centre locations with good transportation.
n Regional office markets have been very stable since 2000. Focus on more aggressive repositioning strategies of marginal properties in regional centres such as Newcastle, Leeds and Bristol, to achieve higher rents and capitalise on the demand for Grade A and high quality Grade B properties.
n Central London - the centre of the post-2000 global capital markets slump - has hit bottom in terms of office tenant demand and rents. Capitalise on rising rents and lack of supply in this dynamic international financial centre.
n Strong tenant demand - especially in the South east - makes it possible to lease fully or partially vacant multi-tenant industrial estates. Older but sound and functional properties with low-site coverage provide the potential for yield improvement through lease repositioning or minor physical improvements.
n Public policy has shifted to encourage redevelopment of ‘brownfield’ industrial locations to higher economic uses, particularly retail and residential. Obtain planning consents for the change-of-use of existing industrial estates in edge-of-town, mixed-use locations, and capture the substantial difference in site values.
n Strict planning constraints on out-of-town retail development have shifted investment focus to centre and edge-of-town locations. In general, small shopping and neighbourhood centres face little supply-side competition, so investors can create value by improving underperforming centres either physically or by upgrading tenant mix.
n Returns from retail warehouses can be enhanced by renegotiating leases, widening the permitted uses from planning authorities and by making physical improvements to the properties.