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Propcos e-briefing: Spaceships and the recovery of UK real estate – a Bruce Dear blog

    • Real estate sector

    03-07-2013

    Imagine you’re in a space ship. Below you, the UK glows with property market hot spots.

    London is a searing white ball, blazing with £45 billion of real estate inward investment. This mass money migration is here for weak sterling (profit on entry), the lowest interest rates since 1694, and the prices - still low by 2005/6 standards. London, with its relative abundance of high-end, well covenanted real estate, is also an attractive diversifier for the unimaginably huge surpluses of the oil and dragon sovereign wealth funds. Take China’s Ping An, buyer of the Lloyds building for £260 million. It is part of a conglomerate 27 times bigger than Prudential. With investors like that, it will be a while before the London ball becomes a bubble.

    There is also something new. For the first time since 2008, concentric rings of activity are spreading across the UK from London. Institutions and UK investors are being priced out of their own capital city. They are fanning out in search of yield and promising product; escaping the super-heated yield compression of Central London – currently a tin can in a bonfire.

    Major regional cities are beginning to benefit - Manchester's Q1 investment market topped £162 million.

    The US private equity houses are bringing the animal spirits of America's recovery to the UK's regions. They are competing with the institutions and REITs for logistics, industrial and secondary retail (witness New River’s highly successful link up with Pimco or Oaktree’s purchase of Redditch).

    For US investors, European real estate is currently one big bargain mall. For the UK institutions, if you can get a good tenant in York (or even Inverness) at 6%, why buy at 4% in London?

    Residential is also heating up. The UK has a housing crisis. We need 250,000 new houses a year. In Q1 just over 18,000 houses were completed – the lowest level for 23 years.

    The institutions, REITs and major investors see the opportunity. Legal and General recently took a £210 million stake in Cala Homes. M & G have teamed up with Berkeley. Ultimately though, this problem will only be solved by government intervention: forcing local authorities to release more building land, breaking open house builder land banks, relaxing planning restrictions and incentivising investors to build enduring “Buy to Rent” schemes.

    The Housing Association sub-sector is poised for take off. There is over £2 billion waiting to get in. Again, the government should press the launch button: encourage sale and lease backs, signal a commitment to under write the sector and talk to institutions about their needs.

    The government wishes infrastructure investment would heat up. Investing in it offers one route out of recession (for example, the UK’s 1930s tube development and the US’s New Deal).

    However, so far investors have fought shy of development risk and invested in safe (and therefore not economy changing) completed assets, such as the Canadian Pension Plan’s stake in HS1. Hence Hinckley Point’s trouble finding Chinese or indeed other investors. Fracking’s relatively quick profits will attract international investors in a way that HS2 won’t.

    So it's not champagne time in your capsule; but cautious optimism and a small glass of space beer is allowed.

    UK real estate is recovering: better returns than bonds, more stable than equities and still comparatively cheap.

    When the flight's over you'd better get back your desk. It's going to be a busy year.

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