Is UK real estate still a good investment?

Emerging Trends in Real Estate Europe 2014

We look at the outlook for European real estate investment, finance and capital markets and trends by city and property sector. So what are the investment prospects for London, Birmingham and Edinburgh?

London

  • Existing investment rank: 5 (out of 28). Last year: 3
  • New investment ranking: 5 (out of 28)
  • Development ranking: 1 (out of 28)

London is still a firm favourite with investors seeking core and core plus assets, as it makes the most of its reputation as a safe haven for foreign investors.  The city knocks Istanbul off the top spot for development, up from Number 5 last year. It remains among the top five in terms of investment.

Large amounts of sovereign capital from Asia and Middle East are coming into London.  Funding deals is also easy. You’d be hard pressed to think of anything in central London that would be classified as un-fundable”.

London’s popularity with sovereign wealth funds and other big spenders has inflated prices, leading to concerns there’s a bubble in the making.

The UK’s economic recovery is fragile, though forecasts of 2 percent GDP growth for 2014 are encouraging.  “London is fairly fully priced and now needs rental growth to deliver returns. Because of that a lot of the UK institutions are going into the regions again.”  Investors are also putting money into strong secondary assets that they can turn into core.

Central London’s buoyant prime residential market is also attracting significant interest. Both UK and international investors are tentatively starting to develop and refurbish property, both for sale and rental.


Edinburgh

  • Existing investment rank: 17 (out of 28). Last year: 14
  • New investment ranking: 16 (out of 28)
  • Development ranking: 16 (out of 28)

Locals say that Edinburgh’s position as a key European financial centre make it a safe bet even if Scotland votes in favour of independence, and at Number 17 for existing investments and Number 15 for new ones, the city has remained in the around the same place in the rankings as a year ago.

Interviewees note there is growing interest from institutional investors in the city, particularly those who are trying to get away from high prices in London.  More deals are expected in 2014, as signalled by fund manager Moorfield’s purchase late last year of Quatermile, one of Scotland’s largest urban regeneration schemes on the site of the city’s former Royal Infirmary.

The big question in 2014 for Edinburgh will be Scotland’s independence referendum and what impact it will have on real estate investment in the city.


Birmingham

  • Existing investment rank: 22 (out of 28). Last year: n/a
  • New investment ranking: 20 (out of 28)
  • Development ranking: 23 (out of 28)

Birmingham is a newcomer to Emerging Trends Europe, entering the rankings for the first time this year. The UK’s second-largest city is Number 20 for existing investments, Number 22 for new ones and Number 19 for development.

However, the high price of core office assets in London is encouraging investors to look to the regions, and one of their favourite destinations is Birmingham. This is particularly true of UK institutions, which cannot swallow the low yields and large lot sizes that cash-rich sovereign wealth funds and private buyers are prepared to take for prime London offices.

But it is not just domestic investors; a smattering of foreign money is also sniffing around the city, as evidenced by German open-ended fund Union Invest buying the prime One Snow Hill office building for £125 million at a yield of 6.5 percent last year.  “If I was sitting on a lot of cash, I would go for secondary cities in the UK like Birmingham,” says an international investor. 

However, for some international money, “the lot sizes on offer are generally not big enough and there are few opportunities”.