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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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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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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

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Get ready for the commercial property data revolution

In these uncertain times, modern commercial real estate landlords and operators have turned to technology and data to weather the storm and gain a competitive advantage. Those that do so are arming their companies with an ability to quickly pivot operating models, reallocate investment to counter risk and capitalise on opportunity.

The right software lets you future-proof your business, enables you to understand performance in real-time and most importantly helps you predict what’s next – the biggest hotspots and opportunities, which team members are doing well, and who needs some support.

You don’t have to look far to see the transformative power of data and examples of how it is successfully being applied to drive digital transformation. Take the financial sector, where unleashing the power of data has not only streamlined workflows but also enabled firms to grow their businesses through powerful AI applications that personalise their services.

According to a 2017 Forrester report, there is an increasing gap between financial firms that embrace technology to fuel growth and business transformation and institutions that continue to do business in traditional ways.

The evolution of the stock market also highlights the value that technology and actionable data unlocks. Look at the New York Stock Exchange. Thirty years ago it was characterised by highly inefficient and manual processes and opaque information. Today? Technology has transformed the way the market operates and traders are able to leverage real-time data and algorithmic trading to execute deals in nanoseconds.

The commercial property sector is making great strides in using new software offerings such as leasing and asset management platforms to capture and analyse data. Landlords and brokers are using the resulting insights to make better decisions that move the needle. We’re fast approaching the next major frontier – market benchmarks.

Using real-time market data to make better decisions has been the standard in our own backyard for other property types such as multi-family and hospitality for some time. RealPage Yieldstar® helps PRS owners leverage market data to determine pricing in real-time and for hospitality the STR Global Report helps landlords benchmark a hotel’s occupancy or revenue that day.

Unlike PRS real estate or the hotel space, when it comes to office, industrial or retail properties, market leasing data on pricing, tenant demand or operating efficiency within buildings is neither transparent to the market nor recent.

We are working hard to develop the ultimate market benchmark. In June, we announced plans to launch VTS MarketView™ – the industry’s first real-time benchmarking and market analytics. For the first time, VTS customers will be able to compare their own property-level performance against market-wide data on our platform.

Aggregated and anonymised, this data and insight will be embedded in users’ daily leasing and asset management workflows and presented in context to drive better decisions, informed by key market-wide metrics such as net effective rents, concessions, leasing spreads and velocity, level of tour requests and deal conversion rates.

For the commercial property industry, the possibilities for how technology and data can be applied are endless. For example, AI could be applied to real-time market benchmarks to provide landlords with property-specific predictions and recommendations for maximising asset value.

These are exciting times, but not without risk. Now, more than ever, it’s time to embrace the data revolution or risk being left behind.

Source: Property Week

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Commercial real estate might be reliably disinteresting now, but don’t get too cosy

At a time of political and market turbulence in the UK, there is one area where we’ve seen relative stability. Commercial real estate data in recent months has been fairly constant, with no significant changes to the outlook.

The returns for commercial real estate have remained disappointing relative to recent years, yet there has been some comfort in the lack of surprises from the sector. It’s been reliably disinteresting.

UK commercial real estate has delivered capital value appreciation of 1.9 per cent this year, for a six-month total return of 4.5 per cent. For the rest of 2018, we see potential for capital values to modestly increase, though rental income will most likely make up the largest share of return delivered to investors.

Looking ahead, we expect slightly weaker performance next year. The Investment Property Forum consensus suggests that capital values will decline 1.4 per cent next year, with London offices down 1.2 per cent.

We consider these forecasts reasonable given the slowing economic backdrop in the UK, wavering demand for UK commercial real estate, and a supply increase. The data, then, looks fairly benign.

Yet there are a number of downside risks which have been bubbling under the surface – and investors would be wise to keep an eye on these.

Factors we’d put on risk watch include the UK interest rate environment, sterling strength, and Brexit negotiations. These macro factors could skew the outlook.

Investors should ask themselves the following questions.

Are UK interest rates back?

Interest rates have always been a key consideration for real estate investors, yet the lack of movement during the past decade has put them at the bottom of the priority list.

Real estate is heavily debt-financed, so the cost of debt is an important factor when considering profitability from the sector.

In August, we saw interest rates rise above 0.75 per cent for the first time in 10 years. While our base case is that we will see no Bank of England rate hikes in the near future, a change in economic fundamentals could cause the Bank of England to hike.

Further interest rate hikes cannot be ruled out altogether, and if sustained, could jeopardise capital values – particularly if rates rise against a weakening rental outlook.

Could sterling’s strength return?

Sterling strength is another key consideration. Brexit negotiations in particular can cause spikes and dips in the currency.

Michel Barnier’s comments that the European Union wants to keep close ties with the UK proved just this. His words triggered market optimism about the potential for a positive Brexit deal and caused the pound to move higher.

The referendum result weakened the pound, which has actually boosted international demand for UK commercial real estate. If the pound strengthens over the longer term, this could curb this demand and pose a risk to the outlook.

International investors accounted for over 70 per cent of purchases in the second quarter of 2018, according to Cushman & Wakefield – so this would be a significant loss.

Will uncertainty persist?

Brexit uncertainty has dragged on longer than most hoped and expected. If this continues, we could see increased relocations for some financial services.

Initial scaremongering of a mass exodus from the UK is likely unfounded, but continued uncertainty or a hard Brexit could change the picture.

Brexit uncertainty is also dragging on UK GDP. If it markedly lowers the outlook, total returns from UK commercial real estate are likely to suffer.

While we’re not as doom and gloom in our outlook on Brexit as many, it should be factored into investment considerations at the current juncture.

These risks are present but should not deter investment altogether.

Looking ahead, it is likely that rental income will offer the most potential in returns for investors in commercial real estate.

Since the previous capital peak for the sector, prior to the 2007 financial crash, commercial has delivered an average annual total return of nine per cent for investors. This can be crudely broken down into the return derived from the rental income and the growth in capital value of the property itself.

In our view, capital growth is unlikely to contribute markedly to the total return for investors in commercial real estate in the foreseeable future. It is the rental income which investors should focus on.

For investors in the current environment, then, it would be prudent to focus on quality assets and sound leases when investing in the sector.

Commercial real estate continues to offer some opportunity for long-term investors, yet downside risks must be noted.

Data may have led to many yawns in recent months, but we should not take the constants for granted. Keeping an eye on risks will help avoid any nasty surprises.

Source: City A.M.

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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.