UK economic growth in 2017 was at its lowest since 2012, according to ONS figures, but the amount of overseas money investing in the UK regions last year was at record levels, according to CBRE.
Under the umbrella of Brexit deal uncertainty we have a weakening economy on some measures, while property market activity appears more robust – although the value of sterling undoubtedly played its part in attracting foreign money.
So how do investors navigate this type of market?
The regions have in part benefited from a frothy investment market in London as some investors looked beyond the capital for better deals. The low-hanging fruit – trophy assets – have mainly been picked and investors have started moving up the risk curve.
A key test will be how business confidence fairs in the run-up to the March 2019 exit from the EU.
The Bank of England predicts business investment will be around 25% lower by 2019 relative to forecasts pre-referendum, which could damage growth.
At the moment, office and industrial stock levels are reasonably low and the fact that business caution hasn’t filtered down to property decisions on any large scale is perhaps protecting the market.
The danger if it did could be subdued take-up, rising availability and weakened rental growth.
A (very) general consensus seems to be if you are looking for a quick ROI based on capital growth now might not be the right time to buy.
However, Colin Thomasson, executive director, CBRE Manchester, says there are advantages to a slowing market: “If yields move out a little bit there is not quite the same appetite to buy in a growth story, so it might be an opportunity for those who feel a little priced out of the market.”
And Stephen Inglis, asset manager to Regional REIT, which has assets of £740m, agrees: “With Brexit we can’t sit tight for three or four years while we wait and see what happens. Uncertainty creates opportunities for us.”
The devil, of course, is in the detail, you can’t take a homogenised view of all the UK regions and cities (see data pages).
For patient money, particularly those looking to add value over a number of years, there are still opportunities although Axel Waldecker, managing partner at Ekistics Property Advisors says these are getting harder to find.
Ekistics bought office scheme Exchange Quay in Salford, Manchester last year for £51m. The firm assesses 200-300 cities across Europe looking at broad economic trends, but also micro trends such as graduate numbers and retention. Manchester scored highly as did Leeds and Liverpool.
“We focus on underlying data and focus on long-term trends, the things that ultimately should offer a high degree of value preservation,” says Waldecker.
Managing partner John Pedersen adds: “Ultimately you are delivering a product to market that tenants need to want to occupy. How am I going to market this asset? It needs to sit in a city centre that is of itself doing well.”
Stephen Inglis takes a similar approach for the Regional REIT: “We look at a building and ask can we drive income from it long term?”
Michael Prosser, partner, investment and asset management, Carter Jonas, sums it up: “Even in a low-growth economy, property investment still offers a significant margin of return over and above that of gilts, equities, and interest on cash reserves notwithstanding some yield compression in the market overall.”
The PRS investor
Long Harbour doesn’t invest for the short term, instead it is attracted by what is sees as a long-term, stable residential market, when compared to commercial space.
When deciding where to invest, chief executive Will Astor says the firm first applies a macro economic model looking at things such as job, business and population growth and business failure rates.
This helped the firm identify the top 20 UK cities, but it was missing a boots-on-the-ground assessment taking in factors such as the culture of the city and local environment.
Birmingham was a case in point with a number of regeneration projects, the redevelopment of historic buildings bringing new life to underused parts of the city, and a proactive council.
Competition has got tougher in recent years, but the biggest dangers, Astor says, in a low-growth environment, is when investors rely on “over-exuberant underwriting” that rely on aggressive growth models for IRR.
“The core return has to come from basic fundamentals,” he says. “Clearly we have a housing crisis, but underpinning that, markets have cycles, it’s about when you get in, how you get in and how you deploy money.”
Aside from Birmingham, he sees opportunities in university cities Oxford, Cambridge and Bristol but also cities with good local authorities and he numbers Southampton as one of these.
Manchester is also somewhere he sees great opportunities, but he cautions: “In the North West the availability of land and availability of planning permission means that supply quickly matches demand, so it is volatile.”
