The shock wave generated in the property sector by the referendum may have become more of a large ripple; but there is really little consistency in recent data, most notably within the London area. One thing remains clear; yield compression in London has run its course, and rental income will provide the key driver for further growth.
There is a different picture emerging from the regions however, with centres such as Birmingham proving resilient. Here there is evidence of yield compression in high-yielding assets, signs of a return to rental growth and increasing occupational demand. It could be said that the retrenchment in London is simply a sign of the market getting a little ahead of itself, while conditions in the regions have trodden a path that’s more reflective of the slowly recovering economy.
That pace of recovery in the Midlands looks set to accelerate, but it is well overdue. Middle England has spent decades reeling from a decline in manufacturing; steel, motor vehicles and mining are classic examples. But unlike London, demand for commercial property and interest from new investors, notably the Chinese, are sponsoring a distinct revival.
The business model is nothing new. Real-estate operators are buying up high-yielding assets with a view to adding value through refurbishment, by reducing voids and pushing up rents for new tenants. Many operate an investment strategy that focuses on small value assets, maybe as little as £5m with a high reversionary potential. And there is plenty of room to generate a greater revenue stream. A lengthy period of slow growth and a virtual hiatus on new developments in the wake of the financial crash means there is considerable scope for strong rental growth.
Evidence that confidence is once more returning to the commercial property sector came with resumption of trading in Standard Life Investments Real Estate Fund on 17 October, trading having been suspended on 4 July in the aftermath of the EU referendum vote. The problem here was that as an open-ended fund, investors were able to cash in their investments, and these could not be covered by liquid assets. You can’t sell a property overnight, so Standard Life hauled up the drawbridge. That’s now changed, and as Standard Life suggested, the search for yield intensifies within a world of low interest rates and nominal growth, so the outlook for UK commercial real-estate returns and income remains attractive.
Regional assets are relatively cheap, and for a canny operator there are significant opportunities to generate both rental and capital growth. There are opportunities even closer to London. Milton Keynes for example, as one entrepreneur said, is open for business, especially when considering that out of 8m sq ft of office space, just 80,000 sq ft is vacant.
Palace Capital (PCA), led by veteran Neil Sinclair, likes Christmas and August as favourable times to pick up assets, chiefly through off-market deals. One trick of the trade is, where possible, to buy the company that owns the property, especially if there is debt included because in some cases, taking on the debt allows the purchase to take place for a nominal sum, and also means that there is no stamp duty to pay which would have been payable if the building, and not the company, had been purchased.
In the case of Sol Central in Northampton, the 189,000sq ft building was purchased in June 2015. Existing tenants included a casino that had closed down and a pub. While the pub is still there (closed), the casino owner was keen to exit from a long lease rather than continue paying rent and rates, so Palace received £3.8m for the surrender of the lease and also pocketed a rates refund as the site was no longer being used as a casino.
Identifying changes in office availability also pays off. In Croydon, where there was once a glut of office space, the situation was transformed when office space was converted into residential use, and office space is now at a premium. Many local authorities are very keen to attract new investment, and speaking to the council boss first often pays dividends. Many potential investors have fixed and usually outdated views on some areas. Halifax, once dominated by mills and decaying trade, is now transformed, and the opportunities to buy and redevelop in such areas offers huge opportunities for those prepared to do the ground work.