Recent research has found that the UK has regained its way to the top of the commercial property investment market, overtaking Germany for the top spot. For me, this is a clear indication that UK property still offers comparatively strong returns and lower risk against other geographies, underpinning demand from overseas investors.
Domestically and globally, risk aversion amongst investors has continued to rise and this is expected to remain in 2018 - but for the most part, this does not mean people stop investing. It simply affects what they invest in.
For example, any commercial property investment branded as core, prime, or secure will almost always remain highly popular, while UK commercial will, in comparative terms, always look less risky than some other locations thanks to liquidity, transparency, and high quality stock.
German sentiment drops as UK's rises
Based on the Q4 barometer data, Germany saw a steep fall away in popularity as it dropped from 34% in Q3 to 23% of respondents choosing it as their top spot for commercial property investments. This marks a significant change in attitude towards the German market, with popularity hitting the lowest levels in the barometer since Q2 2016.
This sentiment is reflected by the Savills market reports from Q4 2017 where, despite a modestly higher transaction volume by value, there has been a steady decrease in number of deals, totalling a decrease of 8% over the year. This transaction value increase was held up over the year by a significant increase in industrial space investment, whilst office space saw a 3% decease on 2016 and a 14% decrease on the previous year’s quarter-by-quarter, showing a slowing of office investment in Germany.
On the other hand, despite Brexit uncertainty, the UK saw a modest increase of two points from 27% to 29%, leaping it to the top of the popularity list based on regional focus ahead of Germany, the US (19%) and France (18%).
Showing how the UK has consistently kept a good ranking, with over 25% of investors consistently preferring to invest in the UK, support for this sentiment is provided from the latest RICS survey, noting a sixth successive increase in investment enquiries reported, with a 21% increase in Q4 2017.
Regional markets drive UK investment
Across all investors, the barometer also found that interest in secondary cities within each market has increased over the year, wiping out the reversal of Q3. Focus on secondary cities such as Manchester, Birmingham and Newcastle was marked as a priority by 41% of respondents.
In domestic research, we can see how the regional markets are continuing to drive up UK investment with positive regional sentiment, as investors increasingly look to them amid concerns over the affordability of London's stock.
According to the latest RICS survey, 63% of respondent now view the London market as overpriced, a figure that’s steadily increased throughout the year. Complementing this is the fact that the majority of investors - 70% - see the national property values as fairly priced when London is excluded.
In particular investors are expected to look to regional markets for office space in the next year as London yields begin to fall and Grade A stock dwindles. Supported by new Government investment into infrastructure, the ‘Big 6’ regional UK cities - Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester - should benefit at the expense of London through 2018.
Making the right commercial property investments for you
Commercial property investments provide the opportunity to realise stable growth and/or income. With the increase in risk aversion globally, many investors are seeking the security of asset backed investments in locations with a history of long leases and upwards rent growth. As we can see from the above, this is bringing investors to the UK, where preferential terms have ensured comparatively good returns for a number of years.
In addition, with investors movement away from the capital, there are opportunities in large regional cities and out of town commercial property, which is opening up the market to a new group of investors. The affordability of regional investment opportunities for both investors and occupiers is helping to attract investment and drive growth, supporting the UK commercial property investment market. Online investment platforms are further aiding this opening of the market with commercial property investment being offered both for income or growth through bonds and equity offering.
However, as with all investments, the opportunities need to be properly researched and understood by investors, with taking professional advice always recommended. Investors should ensure they have a diverse portfolio of investments that meet their needs, whether that is prioritising returns - looking for income or growth - prioritising impact, or potentially both.
The good news is that whatever investors are seeking, there is almost always an opportunity in commercial property and the data suggests that the UK still provides a preferential market for investors.
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