The UK may have a small geographical footprint, but when it comes to property investment it has always packed a powerful punch. Indeed, the UK is the world's third-largest real estate investment market by value, after the US and Japan .
Thanks to its liquidity and transparency, its clearly defined legal framework and its historical standing - not to mention its international, business-friendly location - the UK remains a highly desirable place to invest. It has a long-standing and dominant commercial office sector and enticing opportunities are now appearing in logistics, data centres and build-to-rent properties.
Yet there are challenges. As we move into 2021, the UK, like other markets across the world, is currently reeling from unforgiving turbulence - in everything from Covid-19 to rapidly-escalating regulation. Added to that, there's one challenge that will have a major effect on the UK - the as-yet-unknown impact of Brexit.
Yet despite these threats, the investment picture in the UK remains bright. In our recent Ocorian webinar, 'UK Real Estate Investment - Trends, Insights, Pros and Cons', I was joined by real estate experts from the UK and Asia to share our takes on investing in UK property - from the country's most promising commercial opportunities to considerable changes in tax and structuring.
Our consensus? The UK still boasts plenty of opportunity for insightful investors targeting the right places, with the right local knowledge.
Here are the five key trends that emerged from the conversation.
1. Investors still love commercial offices
The UK office sector, especially in Central London, remains by far the largest, most eye-catching area for real estate investment in the UK. Commercial offices have attracted historically strong investment flows from Asia-Pacific, for example. The UK has recently seen notable investment from China in Central London offices, and interest remains strong across the region, with investment coming in from Malaysia, Singapore, Hong Kong and South Korea.
Of course, the office market has been affected by Covid. Buildings are a tangible asset and investors like to see them in the flesh before making commitments to buy. As such, ongoing lockdowns have had a clear impact on investor appetite.
"Transaction volumes have been down significantly," said Chris Gilchrist-Fisher, Senior Director of International Separate Accounts at CBRE Global Investors. "It's quite difficult for overseas investors to see properties to inspect while we're in lockdown. We have seen a couple of instances where they have bought buildings without inspecting, but that's not typically the case."
Gilchrist-Fisher also pointed out that many sellers were waiting to put buildings on the market during the first half of 2021. And that the market will have to wait to see the impact of the world's vaccination programs before we can get clarity on the future.
Yet when things do improve, it's the Central London office market that's likely to pick up first.
In times of distress, we often see people going back to their core markets. London is one of the most transparent markets in the world, with a legal system people trust. And offices are still at the top of the market by quite a long way. Despite the headwinds of Covid and other forces, there is still resilience there, so there are definitely opportunities for investors.
2. Logistics carries massive potential
While all real estate sectors have felt the negative impact of Covid over the past 12 months, logistics has weathered the storm better than most. Not least because the pandemic has had a dramatic impact on people's shopping habits - driving an already accelerating trend towards buying goods online.
The UK still hasn't reached a state of oversupply in logistics, and rental growth in the space has continued to be solid despite the pandemic. "Logistics is the one market where we've seen some uptick in capital values," Gilchrist-Fisher said. "It's a good bet."
Shaldine Wang, CEO at Elite Commercial REIT Management, agreed that logistics remains "flavour of the month", while highlighting data centres as another asset class that promises enticing opportunities - again thanks to the impact the peculiar conditions of last year have had on our demand for online connectivity. "Covid has changed the whole environment of how we live and work," she said. "So datacentres are becoming very interesting to investors these days."
Other UK markets suggesting solid returns include build-to-rent and student housing. But investors should be prepared to put the work in. "Those markets are harder to access," said Gilchrist-Fisher. "Build-to-rent in particular is an emerging market in the UK, but there are pockets of over-supply, and rents need to be watched this year. Investors will try to get into that market, but for many it may not be that appealing, because of these challenges."
3. Fertile lands lie beyond London
Covid has had a serious impact on rental collections, especially in the Greater London area, and this has had an inevitable effect on real estate yields. Gilchrist-Fisher noted that for well-located, quality logistics assets in Greater London, for example, yields may be as low as 3-4%. Which reinforces the idea that a smart portfolio is one with a geographical spread.
As representative of a fund manager, Wang shared how her REIT focuses on a diversified geographical mix in the UK. "To provide a very attractive yield for our Asian investors - as London yields are fairly tight - we invest all over the UK," she said. "In Scotland and North East and South East England, as well as London."
There is of course the presence of counter-cyclical - and potentially counter-intuitive - opportunities outside London. First, the investment potential of retail space across the country looking to rationalise their portfolios. As you go through the UK, there are some very strong towns and cities. In Guildford in the South East, for example, there is a very affluent market and a thriving localised shopping area, which has been unfairly caught up in anti-retail sentiment at the moment.
There is also potential in commercial office space outside the capital and it wouldn't be surprising to see life coming back to office parks in the regions beyond London. In the wake of Covid, people may feel more comfortable driving to office parks in Reading or Surrey than travelling into Central London and having to get on to transport links.
4. ESG is topping the agenda
ESG - the environmental, social and governance aspect of investments - is becoming a critical consideration for investors, either looking to refurbish existing buildings or to invest in new assets. Every potential new property acquisition now has to be looked at not simply in terms of monetary value, but through the lens of how it will be perceived by the corporate entities leasing it in future. And investments in the UK are no different.
"You can't ignore ESG anymore," said Gilchrist-Fisher. "We see corporate occupiers putting this at the absolute top of their agenda. They'll be asking how a particular building will fare as regards ESG, and how it will help them increase their credentials as they look at their own global operations."
5. The authorities are watching structures closely
Like many governments across Europe, the UK authorities are continuing to tighten their restrictions around corporate structuring. Changes include a proposed register for overseas owners of UK property, and a recently imposed capital gains tax on the transfer of 'property rich' non-UK resident entities. Read our summary of the implications of the capital gains tax for non-UK residents here.
Gilchrist-Fisher is confident the proposed beneficial ownership rules, which have been on the horizon for a few years, won't deter investors, seeing it largely as "another bit of the process", and one that will affect corporate entities rather than individual investors.
Wang conceded that the new capital gains regulations have led to increased consultation with HMRC around corporate structuring. Yet she's quick to praise the efficiency of the REIT model in the UK, and stresses there's no need for the added box-ticking to be a deterrent. It's simply a case, she says, of securing the right advice before you act.
"Get a consultant to advise on the overall basis for your investment first, before you jump into structuring the transaction," she says. "That's a very important part of investment in the UK."
Originally Published by Ocorian, February 2021
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