UK investor sentiment and reality – Q3 2014

As a member of the Investment Property Forum (IPF) I attend the Investment Property Databank (IPD) who are now owned by MCSCI, joint investment update with the IPF. Today was the day to see the numbers from Q3 2014. In summary, it was very positive news with regards the market being as strong as it has been pre the crash in 2007/8. However, it was very clear that London is a ‘country in its own right when it comes to comparison to other regions and UK countries. These numbers relate to institutional investments only and the sample size has increased to 9,712 properties across all property types. Topline in Q3 2014 here are the key numbers:

• Total returns now stand at 4.4%
• Rental growth was +0.8%
• Capital growth was +3%
• Income return was 1.3%

These are positive numbers and show how hot the investment market has become with capital growth headlining. In a wider context these numbers are also significant as Real Estate leads the table of all investment classes at 4.4% with Equities negative at -0.9%.

Now back to retail assets. The polarisation between London and the rest is very clear when you look at rental growth where London has seen an increase of +3.5% and the rest of the UK is -14.5%. Rents are only rising in good quality and well located assets – well located is where LDC helps many of its institutional clients through location analysis and health tracking.

Overall the numbers are very positive and this was reflected by the fact that 80% of the IPD sample saw a rise in total returns and only 4% a decline. There have now been five quarters of above average returns, however, retail is the ‘sick man’ at present at 3.7%, which is a drop from Q2 2014 when they were 4.3%. Of note here is the regional variances where the North West (where LDC vacancy rates are the highest) saw total returns of just 2% whereas London (West End) achieved 7%! Of some surprise, but perhaps the sample size is smaller, is the South West that has relatively low vacancy rates and showed a total return of just 3%.

Whilst rental growth is often talk of the town with investors I noted with interest that there have been falling rents in the East Midlands, Yorkshire & The Humber, East of England and Wales. But what about the North West and West Midlands which, have challenging vacancy rates, and perhaps the institutional money is not in these high vacancy locations!

So all in all the numbers are very positive but retail is lagging behind office and industrials and it is only in the prime locations where there is rental growth based on large catchments and high occupier demand. These assets are safe bets for investors and tick the much used term ‘sustainable prime’. In 2007 there were £56bn of investment transactions, according to Cushman & Wakefield, and in 2014 we are on track to beat this so without doubt the data shows that the property investment market is not just alive and well but thriving. The only caveat is that retail is some way behind and who knows what 2015 will bring with regards retail sales, interest rates, inflation, wages and consumer confidence.