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Brexit: a boon not block to London investment in 2019

There is firm evidence of what market participants are witnessing every day with their own eyes – that Brexit has not scared overseas investors buying commercial real estate assets in the capital.

It is not a case of the market struggling on ‘despite Brexit’. Rather than dampen the enthusiasm of foreign investors, Brexit has had the opposite effect.

Several overseas property investor clients highlight the weaker British pound as a reason for their continued heavy investment in the London property market. Many foreign investors have seen the UK government actively discouraging foreign investment in residential properties, for example by increasing stamp duty land tax (SDLT) rates for additional residential properties and residential properties purchased by companies, and have in turn switched their sights to commercial property – for which SDLT rates are significantly lower.

We can see this continued interest illustrated in some of the high-profile office acquisitions of 2018. In June, a Hong Kong-focused property developer snapped up the London headquarters of UBS, and a couple of months later, South Korea’s National Pension Service purchased Goldman Sachs’ European headquarters for £1.1bn.

It is not surprising that a significant portion of foreign investment in the London property market is in the commercial office sector. The West End is ranked the second most expensive rental office market in the world, with the City not far behind at number 10. The rise and rise of shared office space, spearheaded by WeWork – a privately owned US company – highlights the new ways that foreign investors are tightening their grip on the London office market even as the clock ticks down to Brexit.

2019 promises more of the same – more big ticket deals, more shared office capacity and more investors making moves into the capital’s commercial property – with significant cause for optimism right across the market.

Source: Property Week

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North’s office market reports record 2018 in year of political uncertainty

THE Northern Ireland office market enjoyed a record 2018, with more than double the business reported in the previous year.

CBRE’s latest Real Estate Outlook report shows the office sector in the north is flourishing, with a record 885,023 sq ft of take-up reported across 84 transactions

Notable office deals completed in 2018 include PwC’s move to Merchant Square, the Northern Ireland Civil Service to 9 Lanyon Place and the opening of the new Allstate Belfast base at Mays Meadow.

CBRE managing director, Brian Lavery believes the local office market is well placed to continue on an upward trajectory in 2019.

“Foreign direct investment in the region remains strong and indigenous technology and professional services businesses are growing as the latest office accommodation results indicate,” he said.

“We believe that Northern Ireland can capitalise on ‘north-shoring’ opportunities from London and Dublin going forward into 2019 and beyond despite Brexit dominating the landscape because of the supply of talent and the attractive costs base.

“Currently we only have around 250, 000 sq ft of Grade A office space available fragmented across a number of buildings underpinning the need for more investment in this space. Alongside this office space growth, we are also seeing the green shoots of demand for residential living in the city centre. We believe this is the trend to track in 2019 and beyond as investors across the UK and globally continue to look for opportunities in this area.”

In spite of the relative positivity within the commercial property market, a lack of investment is a cause for concern, with the ongoing political uncertainty cited as factors in a decline in activity.

Key transactions over the last 12 months included the sale of Metro Building in Belfast to a local investor for £21.8m; the £18m acquisition of the NCP Car Park at Montgomery Street, Belfast by CBRE Global Investors; and Belfast Harbour Commissioners’ purchase of the Obel Building for £15.2m.

“At present, Northern Ireland does offer a unique investment opportunity, although success will be dependent on a Brexit deal which prioritises the local business and economy,” Mr Lavery added.

Meanwhile it has been confirmed the Northern Ireland Investment Fund, launched by CBRE Capital Advisors at the start of 2018, has already invested 30 per cent the initial £100m allocation.

CBRE is expecting to announce a suite of additional loans to fund the development of hotels, high-tech research facilities, energy efficiency and industrial infrastructure with employment space in a variety of locations across Northern Ireland in the coming weeks and months.

Source: Irish News

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‘Dark cloud above our heads in form of Brexit’ after spectacular year in commercial property

SCOTLAND’S commercial property sector rode a financial services wave after Barclays’ Glasgow acquisition but while the “mood music is very positive, ultimately there is a dark cloud above our heads in the form of Brexit”.

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Boost to Scotland’s commercial property market as year comes to an end

MORE than £2.5 billion is expected to have been invested in Scotland’s commercial market by the end of the year, according to one global property company.

Some £2.485bn worth of deals have already been completed, and Savills says this will round up by Hogmanay.

The figures mark a 10% increase on those from last year.

Nick Penny, head of Scotland at Savills and director in the investment team, said: “Regardless of Brexit, the simple economic argument around supply and demand of good quality offices is very compelling for Scotland.

“Our development pipeline and general market confidence was paused for longer than the rest of the UK following the financial crash due to uncertainty around the independence referendum. The result is a critically low level of Grade A office supply in Edinburgh and Glasgowthat makes a strong case for rental growth and new development.

“Highlighting this point is the reality that Edinburgh’s development pipeline is now almost entirely pre-let.

“Low yields in Edinburgh reflect the potential for growth and lack of risk however despite the strong level of investor demand for the Scottish capital, a lack of assets being marketed for sale in 2018 as a result of preceding record levels of activity has hampered overall transaction volumes.”

In 2018, Glasgow saw nearly twice the office transactions than Edinburgh did, and Aberdeen also saw a rise in activity with close to £170 million changing hands.

Penny added this greater spread of investment activity across Scottish cities, rather than specifically in Edinburgh, was notable.

“By investing in Edinburgh, and Glasgow, you are investing in a landlords’ market as supply is so limited and with its World Heritage status there will be restricted opportunity to change this dynamic in Edinburgh.

“Meanwhile, in Aberdeen a gradual improving economy and uptick in office activity being led by the oil and gas sector is piquing the interest of those investors looking for value.”

Savills says prime office yields in Edinburgh are at 4.5%, Glasgow 5.25% and 6.25% in Aberdeen.

Source: The National

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Investing in commercial property: beware the Brexit clause?

Last month saw an apocalyptic picture painted about the impact of Brexit. The Bank of England warned that commercial property values could fall 48% in the event of a No-deal – worse than the global financial crisis – and even a more “orderly” Brexit could see a 27% drop.

The severity of the warning seemingly took many by surprise. However, the negotiations and the resulting wider economic uncertainty have been impacting commercial property valuations and tenant demand for some time.

‘Brexit clauses’ have become a feature of commercial property valuations since the Referendum, stipulating that values can’t be guaranteed following the March deadline. But while previously, these clauses were typically buried in the “boilerplate” wording, now they’re front and centre, presenting a much bigger obstacle for institutional investors. Funds are increasingly sitting on their hands, with some suspending or aborting live deals, reluctant to gamble stakeholders’ money in a market with such a blind spot.

Silver linings, not Brexit blues

But this isn’t Armageddon. One person’s risk is another’s opportunity and the vacuum left by institutional investors has left the door open for cash-rich private or family office investors. With no institutional shareholders and often no short-term debt pressures to satisfy, they can take a longer-term view. They’re actively looking to price and pursue risk, especially (soon to be) vacant properties and will remain a force to be reckoned with in this period of Brexit limbo.

A simple reading of the Central Bank’s numbers also ignores the fundamentals underpinning UK real estate. The headlines might say differently, but our major cities continue to be buoyed by overseas capital. Over three-quarters of the £5.3bn spent on Central London office transactions in Q2 this year came from foreign buyers.

So before everyone pours freezing cold water on the market, we should remember that Sterling’s devaluation has ensured that UK real estate remains attractive. And, with investors now getting more bang for their buck, we’re arguably more appealing than other territories. Compared to many other competitor markets we have more transparent, real-time data available, alongside a mature professional infrastructure and easy access to finance to aid investment decisions.

There’s also the intangible: certain investors will always want to be in the UK and feel a sense of inherent security investing here. It may not feel like it now, but historically we are far more politically stable than many other countries and have a well-established rule of law. Depending on where you sit, these are key factors for investors’ wish lists.

Yes, Brexit presents significant challenges. It would be foolish to pretend otherwise. But it doesn’t have to be a perennial spectre. Some might argue that the uncertainty generated by a potential change of government at Westminster because of Brexit – rather than Brexit per se – is a bigger concern and would have a more significant impact on investment decisions. With continued resignations and reshufflings, no one can say for certain what will happen politically.

When the dust settles however, just as after every major disruption to the sector in the past 30 years, we’re likely to find that a number of risk-savvy, cash-rich operators have done well from the uncertainty and will be well-positioned for whatever the post-Brexit World throws at us.

Source: Property Week

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New opportunities and risks in evolving market

It is widely accepted that we have reached a late stage of the property cycle. Some even argue that a downturn has already set in. However, our view is that while values feel pretty full, we certainly aren’t in bubble territory. It is reassuring to note that UK commercial property values have increased half as much as they did during the last cycle and the industry as a whole is nothing like as highly geared as it was in the run-up to the financial crisis a decade ago.

However, as lenders and investors, we can’t afford to be complacent. We remain alert to the risks of lending late in the cycle which today are as much, if not more, of a concern as structural changes in the market. Against this background, we have still been able to find value and we have invested more than £800m over the past 12 months, including our largest transactions to date in both our senior debt and partnership capital strategies, while we have been able to back some very interesting residential development opportunities in London and the South East.

The most obvious risk in today’s market is posed by changes to shopping habits. The inexorable rise of online shopping has already started to bite hard into the retail property market and undoubtedly, values and rents will continue to come under more pressure. We have therefore been reducing our exposure against retail property for some time but we are not turning our backs on the market completely.

”As lenders and investors, we can’t afford to be complacent. We remain alert to late-cycle risks”

While there is clearly trouble ahead for department stores and the centres they anchor, many retail centres will continue to attract shoppers, particularly those in densely populated areas that are focused on convenience shopping. We’ll continue to back borrowers and partners with deep retail experience in this part of the market.

The industrial market presents very different challenges for us. The rise of ecommerce is driving growing occupier demand but this means competition between investors to buy assets and between lenders to fund them is high. We have been active in the industrial market for many years but, with investment yields contracting to record levels, we see better relative value in development than investment and have funded two speculative warehouse schemes in the South East in recent months. Having said that, one of our biggest loans this year, and the largest loan to date in the senior debt programme, was the £125m refinance of an industrial portfolio, predominantly located in the West Midlands.

‘Live-work-play’ situation

The office market is also going through a period of rapid change with TMT tenants driving demand in many parts of the country, not just London, which are often followed by co-working operators, with most looking for that millennial-friendly ‘live-work-play’ situation. We are keen to support borrowers targeting this market, as evidenced by our loan earlier this year to support FORE Partnership’s £51m acquisition of Tower Bridge Court on the South Bank. It was our first office deal in London since 2015 and we are on the lookout for others as pricing for value-add investments in the capital is looking increasingly attractive.

evolving market

Tower Bridge Court £51m acquisition and refurbishment whole loan

We also continue to target the other major UK cities, confident that despite the uncertainty around Brexit, there are good lending opportunities available. The fundamentals of the office market in large UK cities remain healthy. Demand for space is robust; this has been driven by strong employment growth; supply remains tight due to a lack of new development and a similar lack of conversion of secondary office space to residential under development law.

Alternatives also look more attractive than ever. In an environment where Brexit brings an uncertain economic outlook, it clearly makes sense to be lending and investing in sectors where demand isn’t tied to the economic cycle. One such example is data centres; demand for data is set to grow exponentially but there are a very limited number of locations that can meet data centres’ specific requirements for connectivity or power. As well as backing student accommodation and hotels, which have been our alternatives bread and butter since 2011, we have been providing finance for data centres as well as a number of other non-traditional assets this year.

Indeed, we made our biggest-ever loan across the business this year in the alternatives sector – a £200m whole loan to Royale, an operator of permanent park homes aimed at the over-50s. The loan was backed by 27 individual parks and 3,500 plots, providing a good level of granularity. We also like the fact that the number of over-50s is set to grow at twice the rate of the whole population.

This year, ICG-Longbow expanded its direct investment activities with the launch of our build-to-rent business, through the Wise Living joint venture with SDL Group, and a pan-European sale-and-leaseback strategy. Growing both will be a key focus for us in 2019. Increasing demand for private rented housing gives us confidence in the outlook for build-to-rent, particularly as our focus is on family housing, which is an undersupplied part of the market. The sale-and-leaseback business is also an exciting venture for us that brings together ICG-Longbow’s property expertise with ICG Group’s 29-year track record of investing in European corporate credit deals.

We also plan to expand our partnership capital lending and investing activity into continental Europe in due course. For us, it’s a natural progression for the business and doesn’t mean we’re any less interested in the UK. Although the UK market faces challenges, not least Brexit, we are still firm believers that there are plenty of good opportunities out there.

Healthy sign for the market

Looking at the supply of capital to the market, we see that banks remain cautious and have lowered their LTVs. However, we see this as a healthy sign for the market as a whole and they at least remain active. From our perspective, the fact they have pulled back somewhat is helpful for obvious reasons. When it comes to our senior lending, we used to compete with the banks mainly on our flexibility and speed, whereas now there is usually substantial clear water between our terms and the banks on leverage, while in the higher LTV whole loan market there are only a handful of lenders equipped to underwrite more complex property strategies, including value-add and development.

Finally, in the residential construction market, we have seen more activity from other non-bank lenders, but in our opinion this has been more than offset by a couple of UK banks pulling back from the market, while the volume of debt capital available still remains low relative to financing requirements.

With positive occupational fundamentals in all but retail, we look ahead to 2019 with confidence that there will be plenty of attractive lending opportunities, despite (or even potentially resulting from) the ongoing political uncertainty. Having raised nearly £900m across our senior debt, partnership capital and residential development strategies this year and with fundraising efforts still ongoing, we have plenty of firepower coming into the new year and we look forward to continuing to support our customers with our flexible capital and partnership approach going forward.

Source: Property Week

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Decline in new UK commercial property construction work within private sector

The results of the EU referendum have been detrimental to the commercial property sector with the number of constructions continually decreasing, according to an analysis of the figures by Savoy Stewart.

With figures from the Office of National Statistics (ONS) showing a monthly decline in the number of new UK commercial construction work undertaken by the private sector since December 2017, the property firm analysed the number of commercial properties available to let in 20 of the biggest cities in the UK.

As expected, the city with the highest number of commercial properties to let was England’s capital city London, which had 6,137 properties in November 2018 available for businesses to rent.  However, figures from estate advisory organisation Colliers claims that 90 percent of London office availability is constituted by second-hand product, while new/refurbished availability is down by over a third in the past year.

Scotland’s capital city Edinburgh had the second lowest number of commercial properties on the market to let (133). And although Edinburgh’s figures seem to be less intriguing than anticipated, it seems Scottish commercial real estate has experienced a bounce back, with a total return of 1.7 percent in the third quarter of 2018; a 1.4 percent rebound in the second quarter.

The figures, which were extracted from property website Zoopla for the month of November 2018 also showed that The cities with the highest number of commercial properties to let in November 2018 on Zoopla were: London (6,137), Derby (822), Birmingham (724), Manchester (501) and Leeds (481).

The cities with the lowest number of commercial properties to let in November 2018 were: Preston (153), Coventry (145), Belfast (145), Edinburgh (133) and Newport (128).

Source: Work & Place

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What does the future of property finance look like?

Looking to the next decade of real estate financing, a number of factors are on the minds of lenders and borrowers including the rise in the volume of debt finance and the impact that technology may play.

As the commercial real estate finance sector becomes more fragmented and complex in the UK and Europe, I believe debt advisers will play an even more significant role here, as they currently do in the US. In the future, advisers will be selected for their brainpower, commercial and technical ability, breadth of relationships, and ability to advise on complex situations and structures.

One of the main insights from our discussion was that the debt adviser is going to play an ever-important role in the sector as funding becomes more fragmented and new lending capital emerges. Attendees also debated the role that technology will play in the future of the property finance sector, and the importance of traditional relationship banking vs. the new-age software algorithm driven approach to bring deals together.

Our recent roundtable at Spire Ventures, which also brought in technology experts, highlighted the impact that technological advances could make in coming years.

While traditionalists defended the role of relationships in finding borrowers’ the finance they require, proptech challengers highlighted the role of technology to deliver a more efficient experience for borrowers and lenders alike. The consensus reached was that a hybrid approach that is both technology-enabled and relationship-driven would be the future of the CRE debt sector. Attendees agreed that there is a tremendous amount of change yet to come to the sector, and it’s definitely a sector to keep an eye on. Ultimately, however, even with the best technology in the world, you can’t AI away good old-fashioned commercial instinct.

Faisal Butt, founder of private equity boutique Spire Ventures and venture capital firm Pi Labs

Source: Property Week

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Commercial property market ‘showing plenty of resilience’ in Yorkshire

Despite the wider UK economic uncertainties and of course the unknowns of Brexit, the commercial property market in Yorkshire is holding up well and showing plenty of the resilience the region is famed for.

The industrial market in particular is very active, with increasing numbers of businesses looking to expand outside city areas into the many industrial parks that have sprung up in recent years. In the latest RICS commercial property market surveycovering Q3 of this year, surveyors were positive about Yorkshire with one observing that there are “no signs of pre-Brexit jitters”, adding however that “we need more stock to enable occupiers to fulfil their expansion plans”. The demand for good commercial space is high.

Turning to the focal point of the regional economy, Leeds, the city is home to many major development schemes. A report from Leeds city council published in 2017 highlighted that there had been £3.9bn of development schemes completed in the city over the previous ten years – with a further £7bn in the pipeline. You only need to look at the number of cranes against the skyline to see that this activity is still forging ahead.

The blot on the landscape, however, is retail. The national malaise affecting the High Street applies in Yorkshire as much as anywhere else. Many city centre shopping centres are struggling to attract business. Some areas with a relatively wealthy demographic, such as Harrogate, may be continuing to attract footfall, but other cities in the region are undoubtedly finding the going tougher. Retail property values are struggling to hold up and funds have begun to exit the sector in favour of office and industrial.

The Chancellor’s Budget recently included measures to help the High Street, with £900m in business rates relief for small businesses, a £675m ‘future high streets fund’ for the transformation of high streets and potential changes to planning rules to allow shops to be converted in homes and offices. How far these measures will go, in Yorkshire and nationally, to support the retail sector and stimulate demand for space only time will tell.

One of the great factors supporting the resilience of the Yorkshire market is the attractiveness of the region as a place to live and work. The population of Leeds, for example, is projected to grow from 779,000 in 2016 to 826,000 in 2026 – an increase of 6%. The popularity of the region as a place to live means that it will also remain a good place to do business, underpinning both the residential and commercial markets. This will be further bolstered when HS2 eventually comes on line, increasing and improving connectivity.

The recent decision of Channel 4 to make Leeds its new national headquarters was further proof of the attractiveness of our region and a great shot in the arm for the city. It will have a ripple effect across the local economy.

Lenders remain active in the market, willing to lend against good residential and commercial developments.

With a growing population, improving infrastructure and funding available, the region’s property market looks set to continue to offer attractive opportunities for both developers and occupiers.

Source: The Business Desk

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Scottish commercial property sector outperforming UK average

RETURNS on Scottish commercial real estate are continuing to push ahead of the UK average, according to a new report.

Data released by leading property consultant CBRE reveals that Scottish commercial real estate achieved a total return of 1.7% in the third quarter of 2018. This is a rebound from the 1.4% recorded in the second quarter, and a return to the same rate of return in Q1.

While there remains a 120 basis point difference between the annual total returns, with Scotland at 7.0% compared to the UK’s 8.2%, three sectors in Scotland – offices, retail and alternatives – are now ahead of the UK as a whole. This is most noticeable in high street retail with annual total returns of 6.4% in Scotland, versus 4.0% in the rest of the UK.

The one sector bucking the trend is industrials, where superior rental performance in London and south-east England continues to fuel exceptionally strong returns. This has helped push the UK industrial total return to 19.3% for the 12 months to the end of September, compared to 8.4% for Scottish industrials.

The main surprise this quarter in Scotland was a marked improvement for the retail sector. Total returns increased to 1%, a rise of 0.7% from Q2. However, the sector still has the lowest overall return in Q3, behind offices (2.2%), alternative property (2.4%) and industrials (1.9%).

For the third quarter in succession, the annual Scottish all property total return was virtually unchanged at 7%.

Individual sectors have shown more change, in particular offices and industrials. Office annual returns were the only ones to improve over the quarter, rising to 8.6% for the year to the end of September.

In contrast, industrial returns fell slightly to 8.4%, with the alternative property remaining the only sector with double-digit returns over the year (12.6%), well ahead of the weakest performer retail, at 4.0%.

Martyn Brown, a director in CBRE’s investment team, was encouraged by the results. He commented: “Unsurprisingly, the office sector was the best performing asset class in Scotland during Q3, driven by the strong capital value growth achieved in several noticeable investment sales.

“International buyers continue to be active in Scotland, attracted by the softer yields and higher returns on offer when compared to similar investment deals south of

the border.”

There is also now a marked difference between the performances of offices across Scotland’s three largest cities. Glasgow offices, at 7.6%, are positioned close to the all property total return, while Aberdeen offices saw a 4.1% return, continuing the recent period of improving quarter-on-quarter returns.

For the retail sector, returns in Aberdeen have technically slipped back into negative territory with an annual return on -0.3%. For Glasgow and Edinburgh, returns are higher, with Glasgow seeing the best performance of 8.2%, just ahead of its office returns.

A total of £505 million of stock was transacted in Scotland during the third quarter of the year, down from £578m achieved in Q2. This now sits at a similar level to the volumes achieved at the same time in 2017.

Overall, there was £1.77 billion spent across Scotland during the first nine months of 2018, a 27% rise from the same period in 2017. With over £670m, the office sector has seen more money directed towards it than any other commercial sector. Meanwhile, more than £300m has been spent on retail warehouses.

Source: The National