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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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Brexit and the City – A barometer for London’s financial outlook

London’s skyline is changing fast, pierced by gleaming new skyscrapers which defy predictions of a Brexit-related slowdown in the capital’s two financial districts.

With only six months until Britain is due to leave the European Union, the terms of its separation have yet to be decided, leaving critical questions over the long-term future of London as the bloc’s pre-eminent financial centre.

Some politicians and economists expect the split will damage the City, as the capital’s traditional financial services centre is widely known, while Brexit supporters say it will benefit from being able to set its own rules.

Reuters is publishing its third Brexit tracker, monitoring six indicators to help assess the City’s fortunes, taking a regular check on its pulse through public transport usage, bar and restaurant openings, commercial property prices and jobs.

The latest Reuters assessment shows a slowdown in some areas, while others are thriving despite the uncertainty.

“It is certainly an awful lot better than we expected 12 months ago and dramatically better than we expected 24 months ago,” Mat Oakley, head of European commercial research at real estate agents Savills, said.

Although property prices and hiring rates have slowed, the number of bars and restaurants open in the centuries-old financial district are at a record level and financiers still queue at the security scanners at nearby City Airport.

Britain is due to leave the EU on March 29 next year, but there is so far no full exit agreement and Prime Minister Theresa May’s plans for future trade ties have been rebuffed by both the EU and many lawmakers in her own party.

Many business leaders fear that a political crisis could propel Britain into a chaotic and economically damaging split, spooking financial markets and dislocating trade flows.

The latest Reuters jobs review shows just about one-in-ten of the about 5,800 jobs flagged as being at risk of moving out of London or being created in another EU city by the end of March have actually moved, although many firms have taken steps to change their legal structure to enable a swift change if needed.

Jobs leaving London

As few as 630 finance jobs have so far been shifted or created overseas due to Brexit, a far lower number than first predicted, suggesting London will retain its position as one of the world’s top two financial centres, firms employing the bulk of UK-based workers in international finance told Reuters.

The results from a Reuters survey of 134 firms, following up on two previous surveys, show that although companies have made detailed contingency plans they are delaying moving large staff moves until after the outcome of negotiations with the EU on the future trading relationship.

Hiring numbers

The number of available jobs in London’s financial services industry fell the most in six years in 2018, said recruitment agency Morgan McKinley, which hires staff in finance.

It bases its number on the overall volume of mandates it receives to find jobs and applies a multiplier based on its market share of London’s finance industry.

Commercial property

Reuters obtained property data from Savills and Knight Frank, two of the biggest real estate firms in Britain. Savills calculates the value from all-known property deals within the City of London area.

The price of renting real estate in the City of London district fell 6 percent in the first six months of the year, falling to 75 pounds per square foot, from 78 pounds in the third quarter of 2016, Savills says. The rental prices are 1 percent higher than in June 2016 when Britain voted for Brexit.

“The story seems to be that big corporates are planning through any period of potential uncertainty. They are taking a five or more year view because some of these deals that we count as happening today or happening in the first half of the year the tenants are not moving in until say 2022,” Mat Oakley, head of European commercial research at Savills, said.

“I wouldn’t say prices are booming….but they are certainly holding steady.”

In Canary Wharf, prices are little changed since last year, Knight Frank, whose data comes from landlords, developers and agents, say.

Global foreign exchange

Britain has defied sceptics and extended its lead in the global currency trading business in the two years since it voted to leave the European Union.

Reuters analysis shows forex trading volumes in Britain had grown by 23 percent to a record daily average of $2.7 trillion (2.1 trillion pounds) in April compared to April 2016. That was double the pace of its nearest rival, the United States, which was up 11 percent to $994 billion, mostly out of New York.

Going Underground

Some 400,000 journeys are recorded every day at the three main underground stations that serve the City and Canary Wharf.

Reuters filed Freedom of Information Act requests to Transport for London, to get this data, which shows that the number of people using Bank and Monument stations fell in the first six months of the year.

City Airport

The number of passengers using London City Airport, a popular gateway for finance executives, rose to a record high in the first six months of the year.

Bar and restaurant openings

Reuters filed a Freedom of Information Act request to the City of London Corporation to find the number of new premises which have applied for licenses to sell alcohol and license renewals.

The number of venues, such as bars and restaurants, with licenses to sell alcohol in the City of London in 2017 rose 10 percent, data from the municipal local authority shows.

The number of venues applying for new licenses fell slightly compared with 2016, the data shows, although the City of London Corporation said such fluctuations are normal.

Source: UK Reuters

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Forget buy-to-let! Consider these commercial property investments instead

A growing number of buy-to-let landlords have been moving towards commercial property following recent regulatory and tax changes that have made investing in residential buy-to-lets less attractive. The characteristics of commercial property are, however, different to residential property. For starters, investments in retail and office property generally require greater amounts of capital and specific technical expertise.

Commercial properties are also regarded as higher-risk investments, due to typically higher average vacancy rates, which can make it difficult for ordinary investors to rely on a single property investment for income. Instead, most investors would probably be better off pooling their money with other investors, via a property investment trust or a REIT, as this will allow you to benefit from added scale, diversification and the skill of the fund manager in looking after your investments.

Keeping that in mind, here are three commercial property investments that deserve a closer look.

Diversified portfolio

With total assets of nearly £1.5bn, the F&C Commercial Property Trust (LSE: FCPT) is one of the UK’s largest actively managed closed-ended companies investing directly in commercial property.

F&C aims to provide investors with an attractive level of income from a diversified portfolio of prime commercial property assets. The managers invest principally in three commercial property sectors: office — retail and industrial — focusing on investments that they believe will generate a combination of long-term growth in capital and income for shareholders.

The managers have a strong track record of delivering robust returns to its shareholders, after having generated a net asset value (NAV) total return of 82% over the past five years. There’s great income appeal too, with the company paying monthly dividends that currently annualise at 6p per share, giving prospective investors a yield of 4.2%.

Less retail exposure

Looking ahead, it may be a good idea to find a property company with less retail property exposure. With bricks and mortar retailers continuing to cede ground to online sellers, investors are becoming more sceptical towards retail property valuations.

With that in mind, Picton Property Income (LSE: PCTN) may be a better pick. It has just 23% of assets weighted towards retail and leisure, compared to 43% for the F&C Commercial Property Trust. And in place of the company’s lower exposure to retail, Picton is tilted more heavily towards the more resilient industrial and warehousing sector, which accounts for 41% of total assets.

Unsurprisingly, its portfolio construction has served it well of late. The company’s total return for the 12 months to 30 June 2018 was 14.2%, which was roughly double the return achieved by the F&C trust over the same period.

REITs

The REIT space is another good place for investors to look right now, as a number of property giants are trading at big discounts to the value of their underlying assets.

For example, shares in London-focused Derwent London (LSE: DLN) trade at a 21% discount to NAV, for no other reason aside from the weak investor sentiment towards office space in the capital. Analysts reckon the office market in the capital is particularly vulnerable to a ‘no-deal’ Brexit outcome, given the city’s outsized exposure to financial services.

Nonetheless, Derwent London continues to deliver steady earnings growth, with underlying earnings up 14% in the first half of 2018, to 51.8p per share. And on the back of this, the company raised its interim dividend by 10%, to 19.1p per share.

Source: Yahoo Finance UK

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Local authorities splash out £4.1bn on commercial property

Local authorities have spent a huge £4.1bn on commercial property over the past four years and are on track to set a new annual spending record this year, according to exclusive data from Savills. Last year they spent a record high of £1.8bn, a whopping 1,868% up on the £93.8m spent in 2014.

Local authorities

Local authorities

As a result of this spending spree, local authorities have seen their share of total investment in the commercial property market grow from 0.2% to 3.4%. The investment push was sparked by the government’s announcement in December 2015 that local authorities would need to finance their spending entirely from locally raised revenue by 2020. Many councils took advantage of low-interest-rate loans available from the Public Works Loan Board.

With the supply of central government funding due to be cut off, councils need to find alternative sources of income to ultimately pay for the services they need to supply to their residents, says Mark Garmon-Jones, a director in Savills’ UK investment team. Hence the rush to invest in revenue-generating commercial property.

In many cases, councils are buying property in their own town centres to kickstart regeneration projects “that the private sector can’t or won’t do”, says Garmon-Jones, citing the example of retail-led regeneration schemes. “Interestingly, there hasn’t been a shopping centre bought by a local authority outside its jurisdiction,” he says.

Since January 2014, the top five biggest local authority investors in commercial property have been Spelthorne, Runnymede, Warrington, Canterbury and the City of London.

Local authorities

Just a fortnight ago, Spelthorne Borough Council, which had already spent £620m on commercial property since the start of 2017, acquired a £285m office portfolio from Landid and Brockton Capital.

Council spending on commercial property hit £994.5m in the first half of 2018, up from £681m during the same time period last year. Yet Garmon-Jones predicts spending in the second half will cool and end of year totals will be about the same.

He is not unduly worried about the prospect of local authorities becoming significant investors in commercial property. “As long as they are well advised, from houses like ourselves, then fantastic,” he says. “They just need to tread carefully and not get carried away.”

Source: Property Week

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Don’t write off commercial property

The UK housing market is in the doldrums, but commercial property still has a lot to offer.

The residential property market in the UK may have been in the doldrums for the past year, but most of the commercial property market has been in rude health. That was the message from Marcus Phayre-Mudge, manager of TR Property Investment Trust (LSE: TRY), at the company’s recent annual general meeting, following a year in which the trust’s net asset value returned 14%, and its share price 27%. Admittedly, much of this performance came from the 62% of the trust’s assets invested in Europe, but the return from its UK assets has been similar. Since the end of 2015, UK property equities have lagged, with a negative return of 5% compared with more than 50% from Europe, but most of the gap opened up soon after the Brexit vote in mid-2016.

Yet while uncertainty about Brexit “overshadows investment and creates instability, not least in sterling”, notes Phayre-Mudge, “there seems no end to the overseas buyers of trophy buildings”. Other risks hang over the trust too – discord in the EU, rising oil prices (and hence inflationary pressure), and the continued rise in US interest rates (and hence the dollar). However, Phayre-Mudge is “confident in what we own, though careful about what we don’t”.

Physical retail is struggling

Notably absent from the portfolio is exposure to mainstream UK retailing, other than local and community shopping centres. So it holds property investors such as Shaftesbury and NewRiver, but not the likes of Intu or, until recently, Hammerson. “Retailing will get more difficult before it gets better, with rents needing to rebase and valuations heading downwards… There are few transactions, but these are at 10% below asset value.”

While physical retail is struggling, online retailing continues to grow – “logistics sheds are the new shops”. In 15 years, industrial property and retail property have swapped places as the least and most-favoured parts of the market with Segro, formerly Slough Estates, now a sector darling. Student accommodation, self-storage and healthcare have also proved to be growth areas, with secure income streams indexed to inflation.

The office market in central London has been “surprisingly strong”. Phayre-Mudge remains cautious, but notes that companies such as Land Securities, Great Portland and Derwent London have reduced their levels of debt, “so there will be no repeat of the 2006 crunch”. Meanwhile, the market for offices around the M25 has been buoyant, to the benefit of McKay Securities, which specialises in the development and refurbishment of buildings in less fashionable areas, such as Bracknell, Redhill and Egham.

European markets are in good health

In Europe, rising rents and occupancy rates mean that markets are in good health, while rising wages in Germany have been good for the residential investment companies there. This exposure to Europe will protect the trust in the event of what veteran investor Michael Moule described as “a risk ten-times worse than Brexit; the election of a Marxist-inclined Labour government, which may only be a 20% probability but would result in exchange controls, rent controls, lower sterling and inflation”. In that event, Phayre-Mudge would expect to boost the trust’s European exposure and focus its UK investment on properties with index-linked income.

At last year’s AGM, Phayre-Mudge pointed to a great long-term buying opportunity across the property sector. TR remains the best vehicle for such exposure.

Source: Money Week

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Commercial property: Reasons to be cheerful after recent advances

The commercial property market in Scotland has picked up recently and, while it would be over-egging the pudding to say it is buoyant, it is generally upbeat.

Some areas remain sticky, however.

The retail market has not lacked bad news – especially in the regions where high streets have suffered nationally as shopping habits change. However, the secondary retail market is becoming more reasonably balanced, with landlords reassessing where their expectations need to be if they want to let or sell their properties.

Rateable values (RV) and changes in local taxation have, despite apocalyptic headlines, actually helped in many cases. The obvious beneficiaries are smaller shops with RV of less than £15,000 which can end up paying no rates at all.

Across the regions, there has been healthy activity in buying, selling and letting of shop units. Particularly attractive are retail outlets with tenants which the landlord is waiting to sell.

Buyers, restrained for so long, are emerging with ready cash to plough into property in the £400,000 to £750,000 range, whether retail unit or hotel, where they can expect a better return than on most other asset classes. Buyers range typically from retired couples wanting to diversify their portfolios to professionals with idle money.

Above £1 million, the investment money tends to come from property companies who have exhausted their search for bargains in over-priced London and Manchester – and, more recently, the north-east of England.

The perception that “cheap” opportunities await in Glasgow and Edinburgh has become rather outdated and Aberdeen, which was lying with its throat cut for so long, has strengthened and regained some of its feelgood factor.

The industrial market, in line with the rest of the UK, is very strong, although there is no single reason why this should be the case. Rather than just the weight of money in the market from investors, it seems the lack of speculative development means occupation levels across the country are at a high.

The reason for this dearth of building is twofold: it has been hard to finance and the cost of producing industrial units is so high that in many instances it becomes unviable. As a result, the secondary units on the market are getting another shot.

The combination of rapidly reduced supply and increasing demand has created a market that is performing vigorously.

Distribution, as a sector, is doing very well, as consumption inexorably migrates online. At a lower level, the popularity of industrial units for businesses such as scaffolders and builders reflects an economy which is on a relatively even keel.

This strength is not quite reflected in the office sector, which remains patchy. In Glasgow it continues to be evident that the new Grade A stock lets well. However, beneath the Grade A stock, the market is weaker, with a surplus of Grade B vacancies.

Overall, in the UK, there are clearly factors at play changing the face of the office landscape, with new working patterns and more reliance upon online systems, meaning a reduction in need for existing office stock.

This has meant an evolving scenario looking to change of use for many buildings. Rather than struggle to re-let them, owners are selling them as suitable for conversion to hotels, student accommodation or private residential occupation. It’s an intriguing market and optimism can justifiably prevail.

Source: Scotsman

 

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City of London records smashed as office investment soars to 28-year high

Investment in City of London office space has defied Brexit uncertainty to hit a record high as demand for real estate in the Square Mile soars, especially from Asia.

Despite the slowdown in other parts of the property sector such as the housing market, investment in City of London offices jumped to £3.6bn in the second quarter of this year, reaching a peak since global real estate advisor CBRE began records 28 years ago.

The elevated level of activity was led by the £1 billion sale of UBS headquarters at 5 Broadgate to Hong Kong-based investor CK Asset Holdings, according to the CBRE, which pointed out that it was the third £1bn-plus building to sell in the last 18 months.

The City figure was part of a total £5.3bn invested during the quarter in Central London as a whole, which represented an 85 per cent increase on the £2.8bn transacted in the first three months of the year, and a 67 per cent increase on the same period last year.

Thirteen deals over £100m were transacted over the course of the quarter, more than in any quarter since the first three months of 2016, as overseas investors dominated the market, representing 82 per cent of the quarterly figure.

Last year a series of landmark skyscrapers in the City were sold for record sums, such as the Walkie Talkie and the Cheesegrater, which were both snapped up by investors from Hong Kong.

As well as activity from Hong Kong, investors from Singapore and South Korea have also become more active.

“International investors remain hungry for real estate in London and we have seen a diversification in the origin of this capital, albeit the majority is still coming from Asia,” said James Beckham, who sold the Cheesegrater last year and is now head of London Investment Properties at CBRE. “The low level of investment seen in the first quarter of this year has proved to be an aberration.”

He added: “Even in the face of the continuing uncertainty surround Brexit outcome, we think we will continue to see investors coming into London market. Property fundamentals are good in London, with low vacancy rates, good resilient occupier take-up and stable rents.”

Nick Braybrook, a commercial property expert and head of City capital at Knight Frank, told City A.M: “London is still the gold bullion of real estate markets. Compared to other big cities, London has all the big attractions: a more attractive legal system, markets which are more liquid and transparent, and more favourable tax arrangements than quite a few overseas locations.”

Last year the level of overseas investment in commercial real estate in London was more than the next four global cities combined (New York, Frankfurt, Berlin and Paris), according to figures from Knight Frank.

Braybrook added: “Investors who have billions, if they want to buy in the West End they have to do a lot more deals, whereas in the City they could buy one big deal, let to one tenant, and boom! – you’ve spent your billion in a single deal.”

Source: City A.M.

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Sharp fall in value of retail property as high street woes worsen

The UK’s retail property sector has suffered one of its biggest monthly falls in value for over six years amid disappearing footfall on the high street.

The value of commercial property in the retail sector tumbled 0.8 per cent during June, a drop that is equal to the five months before it combined. It was the biggest fall since May 2012, excluding July 2016 (which was seen as an exceptional month after the EU referendum.)

Rents among retail commercial property also fell 0.2 per cent, although as a whole the value of commercial property in the UK rose in the second quarter of the year after a strong performance within the industrial sector, according to the CBRE UK monthly index.

Threats to the value of commercial property have grown as potential insolvencies of major high street giants loom, with House of Fraser, Poundworld and Carluccio’s already announcing widespread store closures.

Miles Gibson, head of research at CBRE, told City A.M.: “These figures are noticeable, and possibly even striking because it is quite unusual. The sentiment in the market is that values are falling in the retail sector.”

Gibson added: “We have seen a Brexit inflation effect – price inflation has been higher than wage increases which means consumers have less in their pocket, leading to a slowdown in retail spending which affects rents paid by retailers on property.”

The value of commercial property outside of London outpaced growth in the capital, with London enjoying a 0.2 per cent rise compared with a 0.6 per cent boost outside of the M25.

Source: City A.M.

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UK commercial property lending surged to £26.8bn in second half of 2017

Commercial property lending in the UK surged at the end of last year, offsetting a drop in lending earlier in the year to bring overall rates in line with 2016.

According to the latest figures from Cass Business School, new commercial property lending overall reached £44.5bn for the whole year, equalling figures for the previous year.

Commercial lending had dropped by 24 per cent in the first half of the year, however, the second half of 2017 was much busier, adding another £26.8bn in new lending.

The total value of loan books identified by the CASS research increased by four per cent to £199bn by the end of the year, including both drawn and undrawn amounts.

Commenting on the Cass figures, Melanie Leech, chief executive of the British Property Federation said: “It is encouraging to see property lending in 2017 remain consistent with the levels seen in 2016, and it is hugely significant that development funding has reached a new high – with a particular focus on residential.

“At a time when government is focused on tackling the issues caused by at least 20 years of housing undersupply, this increased investment into creating new, high-quality homes will provide much-needed new homes to support the UK’s productivity, economic growth and social wellbeing.”

The research from Cass showed that non-bank lenders were actually the most active group, increasing their market share of new loans to 14 per cent from 10 per cent a year earlier. In total, they wrote £6bn of new loans of which 60 per cent was sourced from insurance and pension funds.

Source: City A.M.

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UK commercial property outstrips even most bullish expectations

Offices in the UK continued to see strong takeup in the second half of 2017, as the commercial property sector smashed expectations.

But the performance of retail property was less positive, according to UBS Asset Management’s report, which predicted that the high street will continue to suffer from changes to shopping habits.

Overall, the total return from UK commercial real estate in 2017 was 10.3 per cent, outstripping even the most bullish of expectations.

Demand for offices held up, increasing by 19 per cent on 2016. This segment was given a major boost by the presence of the serviced office sector in London, in particular WeWork.

But the retail sector is still facing headwinds including consumer confidence, meaning demand is slowing for traditional shops. The report also suggested that the spate of company voluntary agreements (CVAs) in recent months could shift the power balance away from property investors in the sector.

New Look, Byron, Jamie’s Italian, and Prezzo have all entered into the process to restructure their portfolios, asking some landlords to agree to rent reductions and closing some sites.

But there is a bright spot in industrial space, which UBS says has a growing role in the increased levels of home delivery. Rents on smaller warehouses in South London are thought to have increased a whopping 50 per cent over the last year due to the demand for last mile fulfilment.

Total returns for the logistics property sector reached 21 per cent last year, and returns are expected to be maintained at an average of 7.7 per cent for the next two year period.

Source: City A.M.