While there may be suggestions that a boom in the commercial property market in London and the south-east is set to moderate, other parts of the UK are asking when the boom is going to begin. In fact, trading conditions remain tough in some parts of Wales and the north-east of England.
However, despite all the recent concern about how the UK's exit from the EU could take the shine off the commercial property sector, a survey by BrickVest, the online crowd investing platform, suggests that 30 per cent of investors taking part listed the UK as their preferred location for further investment, only slightly down from a year earlier - and considerably ahead of Germany, which was favoured by 25 per cent of those taking part.
Now, given that the German commercial property market is not shackled by the prospect of years of uncertainty as the UK negotiates its way out of the EU, and has proved to be an exciting and profitable market for the likes of Sirius Real Estate (SRE) and Phoenix Spree Deutschland (PSDL), what is it that puts the UK ahead in the popularity stakes?
The primary attraction stems from the lack of supply at a time of increased demand. In the wake of the financial crash new commercial property building hit its own brick wall, and it has only been recently that the supply/demand imbalance is starting to be addressed with the construction of new sites. That demand has been accelerated on the one hand by the loss of some sites converted into residential use, and also by changes in consumer habits. More and more customers are buying online, which means that retailers need to construct a web of distribution centres.
UK commercial property (12 month)
There is also renewed investor interest in the larger regional centres, which are only now starting to show a real recovery from decades of decaying industries and under-investment. So, not only is there a shortage of warehouse space, there is also a shortage of modern office space. And despite new construction the UK vacancy rate for industrial space, at 5.4 per cent, is half what it was in the wake of the financial crash. The referendum has also had an effect in slowing down progress in closing the supply/demand imbalance. Industrial landlords had little choice but to acknowledge the heightened level of uncertainty that the referendum generated by cutting back sharply on developments that were not pre-let. Speculative completions in the current year are expected to be down by more than a half from a year earlier.
This is good news for landlords on the rental front. Once again, the regions are playing catch-up, with cities such as Leeds recording the strongest growth rates of around 10 per cent, while yield compression is alive and well.
It has taken decades to reverse the declines seen in the 1980s and 1990s. In Birmingham, for example, unemployment for most of the 1990s was around 20 per cent, compared with 6.5 per cent now. The redevelopment has encompassed all asset classes, with inner-city redevelopment supporting tourism, leisure and some retailing, as well as attracting more financial services as a result of some organisations moving away from London. A good example is Longbridge, the 468-acre site formerly owned by MG Rover. When that collapsed in 2005 the site was bought by St Modwen (SMP) and has been transformed into a mixed-use site including retail, leisure, housing, commercial and office space - and providing employment for around 10,000 people.
On the retail side, the picture is less clear. Consumers have switched to making more purchases through the internet, but there is some concern that while nominal wage growth is pretty steady, the pace of inflation has been accelerating, and that will squeeze disposable income. However, unemployment is at its lowest level for over 40 years and, together with an entrenched shortage of skilled labour, employers may be forced to raise wages to attract and retain staff.
Regional development is also benefiting from a significant inflow of overseas investment, and there are few signs that this has been affected by what has been a year studded by significant events. Commercial property deals in March totalled £4.17bn, down 1 per cent from February, but broadly in line with the long-term average. And while one deal, the £1.15bn sale of the Leadenhall building in London, known as the Cheesegrater, was the largest deal, a geographical breakdown revealed particularly strong activity in regions including the south-west, Yorkshire, the Humber and Scotland. What's more, it seems that domestic institutions are once again starting to dip their toes into the water, albeit on a still relatively tentative basis.
However, some are less sanguine about the longer-term prospects for the regional commercial property market. As further supply reaches the market, so yield compression and upward pressure on rents could start to moderate. Next year also takes us closer to the final outcome of negotiations to leave the EU, and there remains huge doubt as to how favourable or not to the business climate these will be. In a worst-case scenario, there could be a significant effect of economic activity. Even so, sticking with the major regional centres such as Birmingham, Manchester and Leeds appears to offer the least risky approach.
And on a sector basis, it seems that industrial rents are growing faster than leisure, office and retail, while industrial and leisure assets have been showing the greatest rate of capital growth. And while capital values are lower than a year earlier in more than half of the principal submarkets, annual total returns are still positive, with the exception of shopping centres.
IC VIEW
The Brexit process can be blamed for many regional real estate companies nursing heavy discounts to net asset value (NAV). We rather think this is misplaced because there is a real sense of energy in areas that have taken a long time to recover from decades of neglect. And there is no shortage of interest from overseas investors, underpinned by the boost to buying power as a result of the weak pound and also the desire to acquire quality assets delivering a superior yield to that available on gilt-edged investments. There also remains the supply/demand imbalance covering offices, distribution centres and business parks, which will take time to address.
Favourites
St Modwen Properties was badly mauled in the wake of last year's referendum, mainly because of worries that its London Nine Elms development would turn into a white elephant. But with a new chief executive at the helm, St Modwen is currently planning to sell the development, having received high levels of interest. This makes up only 10 per cent of NAV, and the portfolio covers around 6,000 acres. Great strides have been made with redeveloping the old Longbridge car factory, while the 2,000-bed student campus in Swansea could be sold. And yet the shares trade at a 25 per cent discount to 2018 forecast NAV, which looks to be too much. We also like NewRiver Reit (NRR), which focuses on convenience stores. Its development arm is more than 70 per cent pre-let, and it has an interesting portfolio of pubs acquired from Marston's and Punch Taverns. It also pays one of the best dividends in the sector on a quarterly basis.
Outsiders
Intu Properties (INTU) has put in a better performance over the past year, but the shopping mall landlord has admitted that rental income this year is likely to show very modest growth, assuming no more material tenant failures and reflecting the loss of income from assets being redeveloped. The loan-to-value ratio at the end of 2016 was relatively high at 44 per cent. Concerns remain about how consumers will act with regard to plans to leave the EU and signs of rising inflation. It's not that Intu is performing badly, it's just that there are plenty of more attractive investments out there.
