Sunnier outlook sees investors warm to secondary investment

The summer, rather than the year end, often seems to be a pivotal time for property. Way back in 2007 (funnily enough, soon after Real Estate Capitals launch) we felt the UK real estate market “had stopped abruptly and gone straight into reverse”.

Two years ago, August marked a change for the worse, when stock markets fell globally, spooked by fears of an imminent Greek debt default. It shook investor confidence and for a while, people started pulling out of deals and the fragile confidence in European real estate was shaken.

This summer – and it’s definitely not just the glorious weather – the overwhelming mood is one of improving confidence. The view that there is more value in good secondary than in prime has taken hold.

Investors still value property’s income return, but there is now new potential for rental growth. Clearly, the UK economy is still challenging, but the forecast is sunnier than even three to six months ago. There’s a positive outlook, especially in the south- east, says one fund manager who is hunting for well-located buildings with something “not prime” – be it lease length, covenant strength or physical condition. A strong factor is the supply side, with construction still 25% below the 10-year average for new-build property.

For those trying to attract new money into funds after a period when limited investor demand could largely be met by acquiring secondary units, the clouds have parted. It’s hard to raise equity when property values are heading south – it is counter-intuitive to invest in something falling in value. But since May, IPD has recorded modest capital value rises after 18 months of decline.

As well as opening up its former pooled pension fund to other UK and overseas institutions (see p2), M&G has introduced queueing; good practice for when the capital tap turns back on. AEW’s Richard Tanner sees a rise in interest, from wealth managers and IFAs as well as overseas investors.

Regional investments that had no takers a year ago are going to best bids and the few investors, like Tanner, who have been buying good-quality secondary outside London for the past 18 months now have competition. Expect a rash of UK recovery funds from investment managers in Q3.

Bruntwood has always bought property that has been neglected, to improve and hold for the long-term (see p5). Chief executive Chris Oglesby has seen big improvements in the occupancy markets in the regional cities where they operate: Manchester, Leeds, Liverpool, Birmingham. “Across our 2,000 customers, we have more who are growing than shrinking,” he says.

Increased lending market liquidity will also help (see June’s issue). Lenders are seeking finance opportunities and auctioneer Acuitus said last week that one major bank is having “a summer sale” by charging no lender arrangement fees or legal fees in July and August – unheard of since 2007.

Real Estate Capital magazine is taking a short summer break. We will continue to send out news alerts and the next issue is in September.