Foreign investors drive UK commercial property activity in Q2

DTZ, part of UGL Services, a division of UGL Limited (ASX: UGL), today released its latest UK Investment Market Update. The report from DTZ Research, shows total direct commercial real estate investment totalled £8.4bn in the second quarter of 2012, a 21% increase on the previous quarter.  However, the rolling four quarter total remained broadly flat at £30bn.

Nigel Almond, Head of Strategy DTZ Research, said: “The growth over the quarter has been driven by foreign investors in Central London but also across the rest of the UK. Total foreign investment this quarter reached £5.1 billion compared to £3 billion in Q1 2012.  Over 40 percent of overseas capital came from the Americas. In contrast, domestic investment fell over the quarter. Whilst the share of overseas investment in London rose marginally over the quarter from 36% to 38%, growth was most notable outside of London where its share rose from 8% to 23%.”

Total investment activity in Central London in the first half of 2012 reached £7.3bn, close to half the UK total. With £5 billion under offer or currently on the market, the central London total could well reach over £12 billion in 2012, the highest level since 2007.

Although activity in regional markets remains relatively subdued on an historical basis, there have been some pockets of growth, notably in the West Midlands, where quarterly volumes reached £460m, above the longer run quarterly average of £380m. More generally, the UK regional office markets appear to be suffering from growing risk aversion and concerns over the weakness of occupational markets. This mismatch in demand and supply is clear. Investors are focused on core, well let assets, which remain in short supply and this is acting as a constraint on activity.

Bruce Poizer, Senior Director, Investment at DTZ in Manchester commented: “Weaker investment activity is partly driven by scarcity of prime sales, but also by general caution from investors. Whilst we do not expect the return of significant rental growth in the short to medium-term, property investment currently offers very attractive income returns in comparison to other asset classes due to the very strong income returns that are now available.

“We believe there are opportunities in secondary markets, particularly better quality secondary assets where the perceived risks are in reality overstated and could provide better returns given the current strength of demand for prime. Investor interest could extend increasingly to secondary properties as the gap in pricing widens, especially if investors can be convinced that occupiers of such properties are sufficiently stable sources of income to underpin value. As we saw from investors who bought wisely when the market stalled in 2009, very significant returns can be made on the bounce back.

Bruce continued: “With a number of significant loan book sales taking place this year following £4bn of loan sales in 2011, we expect further investment activity in the second half of 2012 and in 2013. Whilst loan sales do temporarily delay the release of stock to the market, we have already seen some assets from the 2011 loan sales come to the market as the new owners take a more decisive action on non performing loans.”

Ben Burston, Head of UK DTZ Research, commented: “Looking forward, we expect investment volumes in the UK to reach £34bn this year, a 13% increase on 2011. Growth will be supported by continued strong demand for well-let prime assets, but also increasing activity in the secondary market where we believe the release of stock through the sale of distressed loans will provide greater clarity in pricing and investor interest.”