Discounts at the prime end of the UK real estate market may have disappeared, but a correction remains a likelihood in the secondary market, according to Peter MacColl, head of global capital markets at London-based advisor Knight Frank.
In the aftermath of the Brexit referendum result in June, investors have managed to snap up prime property assets in the UK at discounts of between 3% and 15%. While these have now been all but eliminated, there is still scope for falls of 5%-10% at the poorer end, he said in an exclusive commentary for PropertyEU. 'With the gap between bond and property yields at its widest since the crash in 2008/2009, property still makes a compelling case,' he argues.
MacColl claims the UK investment market remains attractive despite the turbulent weeks in the immediate aftermath of the Brexit referendum result, when the UK property seemed to stand still and emotion drained the market. ‘Since then the retail funds have generally re-opened, there have been two very significant London occupational deals, and there is liquidity in the investment market.’
The news since July has been better than expected, he points out. 'We advised developer HB Reavis when Wells Fargo acquired 33 Central on in the City of London’s King William Street for its own occupation for £300 mln (€357 mln), and advised Battersea Power Station Development Company on its 46,000 m2 leasing deal with Apple.’
Low interest rates and weak pound
With interest rates continuing to head south, global appetite for yield and strong cash flows remains strong, he points out. 'This is illustrated by the enormous amount of capital being raised for property and infrastructure, much of which continues to be heading to the UK.'
The weak pound is also leading to further increases in activity from overseas buyers, with North American private equity, Middle Eastern high-net-worth individuals and entrepreneurial Far Eastern investors leading the charge. 'In the third quarter of 2016 US investors spent £1.16 bn in the UK compared with £505 mln in the second quarter. But our exchange rate is also now exciting Japanese, Australian, and other new investors.'
MacColls claims the US private equity investors are looking for value-add opportunities, Middle Eastern buyers like sub-£75 mln lot sizes with strong income and cash flows, while Asian investors are seeking opportunities where they can take an entrepreneurial approach. 'We are also now seeing revived interest from UK buyers, with local authority pension funds and tenants emerging as new investors, along with the retail funds beginning to re-look at acquisitions.'
For 2017, Knight Frank is forecasting all-property total returns of 1.5%-2% in the UK, slightly ahead of the latest Investment Property Forum consensus of 0.6%. The prognosis is based on an expected fall in capital values in some secondary markets, a stronger performance for prime assets and income returns ensuring a positive performance overall.
