Over the course of 2014, some £65bn was invested in direct UK real estate – a 16% increase on the 2013 figure and the highest total on record. Remarkably, this was not driven by London, which actually saw a 3% decrease in volumes to £27.4bn. Rather, it was a year of frantic activity in the UK regions, which took the majority of investment by volume. This reflects a greater confidence in the economic potential of cities such as Manchester and Birmingham, as well as the South East outside London, alongside the attraction of higher yields compared to the extraordinarily competitive market in the capital.
This search for secure, long-term, higher returns is producing some other significant changes in the market. The fastest growing sectors are those bracketed under ‘alternatives’ – student housing, hotels, healthcare, privately rented residential – which traded £11.6m over the year, a 33% increase on the 2013 figure. These sectors accounted for only a few percentage points of volumes just a few years ago, but with funds now aiming for weightings of as high as 20%, it is unsurprising that volumes have risen so quickly. We expect these volumes to increase even further in 2015.
Our overview of investment activity in 2015 can be seen in our capital markets infographic here
Globally, capital continues to flow into investment funds. High savings rates in Asia, and ageing demographics almost everywhere in the rich world, imply a stratospheric increase in demand for almost any asset class over the next decade and beyond. Even in the UK, self-enrolment should see more capital flowing into defined contribution schemes. NEST, the default provider, has suggested that as much as 20% of its funds could be allocated to ‘real assets’ (which includes infrastructure as well as real estate). But with the investment market already incredibly competitive, where will this go? Part of the answer must surely be a professional, institutional private rented sector, particularly given the lack of housing in the UK – although this is yet to emerge.
There are problems, too, in conventional commercial real estate. The only way the stock of assets in these sectors can be increased is development. Yet despite grade A vacancy rates below 2% in many English cities, and the City facing a similar issue in 2016 and 2017, the cranes are really not proliferating as much as they should. With demand strong – take-up beat records in almost every market over the year – this is really very surprising.
The Commercial Construction Index JLL produces with Glenigan demonstrates this point. The twelve months to December saw only £23.8bn of new starts; this compares with just under £30bn per annum around 2005-2008. The office sector, which appears to be most on the verge of a supply crisis, is most affected; volumes If refurbishment and extensions are stripped out, the £12.7bn total still looks paltry compared the circa £20bn before the financial crisis. Offices – where shortages could become acute – are most affected: just £6.0bn of starts, compared to £8.8bn in 2007. You can seem more detail in this infographic
Now arguably the market was overheated in that year, but even so, looking at a graph, the supply response seems very modest so far, perhaps reflecting a recovery that, while impressive compared to the Eurozone, is sluggish when held up against historic norms. There are other factors; developers remain cautious and debt is still restricted. But the case for more development is surely now completely clear. Meanwhile, the numbers chasing limited product are likely to grow ever more strongly.
This blog was also posted by Jon Neale on LinkedIn.