UK property investment reaches an all-time record in 2014

Commercial property investment reached a record high in 2014 with activity in the regions outside of London particularly strong, according to research out today from DTZ.

DTZ today released its 2014 UK Investment Market Update and reported a record turnover for UK property investment last year, with an 11% rise to £56bn. The primary driver was a 40% growth in investment outside Central London, rising from £26bn in 2013 to £36bn in 2014. By contrast Central London transaction volume fell by 10% to £20bn, albeit still the second highest annual total ever recorded.

Martin Davis from UK Research at DTZ commented: “After the very strong UK investment market performance in 2013 we expected the trend to continue in 2014. The continued weight of money allied to low interest rates and the attractiveness of commercial property as an asset class resulted in a record year for property investment. This was also reflected in the diversion of investor interest within the UK toward markets outside Central London.”

Foreign purchasers increased investment outside Central London by an enormous 82%, in a year in which their overall UK spending increased by 26%, from £22bn to £28bn. Funds raised from multiple jurisdictions and North American investors in particular moved into the UK regions in 2014.

Lot size rose sharply in 2014 to £29m, close to the level achieved in the boom years of 2005-07. The underlying cause was a strong increase in the number of large (£100m+) transactions, with over four fifths of this increase taking place outside Central London.

Office investment outside Central London increased by 44% in 2014, to nearly £8bn. Office turnover in Central London remained more or less steady. Both office yields and capital values are at record levels, and investors, both foreign and domestic, are looking outside the capital for higher returns.

Shopping centre and retail warehouse investments showed very strong levels of activity. In the shopping centre sector transactions in 2014 totaled £6bn, across 101 centres, the highest total since 2006. For retail warehouse volume also increased to its highest level since 2010, with £3bn of sales in 127 deals.

There was a large increase in multi-regional portfolio sales in 2014, rising 85% to a record level of £12bn. Transactions here were dominated by 10 very large deals, almost all undertaken by foreign purchasers, and totaling £4bn. This influenced the industrial sector in particular, as industrial portfolios, especially distribution warehouses, made a major contribution to the record £6bn amount of industrial property sold in 2014. Here it was almost exclusively domestic investors who participated, acquiring 36 of the 40 lots sold.

Low bond yields will continue to support investor attraction to commercial real estate, and the continuing recovery in occupier markets will also support investment values. A downward yield shift will be sustained for secondary property as prime yields stabilise. These factors will ensure that in the short term at least investor momentum will carry the UK investment market successfully forward during 2015.

Ben Clarke, Head of UK Research, commented: “The longer the current ultra low interest rate environment keeps the yield spread between property and bonds favourable, the further property yields will be compressed. The UK all-property total return for 2015 is set to again be a double digit, though we expect it to fall short of 2014’s 17.9% return. However, front-loading returns in this way comes at the cost of a sharper correction to commercial property prices down the line when the interest rate environment eventually normalises.”