UK Real Estate Market
The United Kingdom, both pre- and post-Brexit, is one of the world’s premier locations for commercial real estate.
According to Ernst & Young’s 2016 Attractiveness Survey, the European market for Foreign Direct Investment (FDI) grew 14% in 2015, while the UK market grew 20%. The survey revealed that “the UK increased its market share from 19.9% to 20.9%” and retained its rank as the number one destination in Europe for foreign investment.
Additionally, the UK Department for International Trade reported that in 2015 the UK saw investments from 79 different countries, a record number, with the UK becoming Europe’s top destination for foreign investment projects from emerging markets.
According to Cushman & Wakefield Research in August/September 2016, a majority of European lenders (95%) say that Brexit has not stopped them from lending in the UK
According to Cushman & Wakefield Research in August/September 2016, a majority of European lenders (95%) say that Brexit has not stopped them from lending in the UK, leaving the commercial real estate market in the UK virtually as attractive as it was prior to Brexit. Edward Daubeney, Director EMEA Structured Finance at Cushman & Wakefield, said:
“Our survey shows that Brexit is having little impact on market sentiment from a lending perspective and the fundamentals remain encouraging.”
Anthony Duggan, a partner in Capital Markets Research at Knight Frank, reports on Brexit as follows:
“Importantly, we see the UK becoming less of a ‘Brexit outlier’ as political risk and uncertainty echoes around Europe and the western world.
Combine this with signs that infrastructure spending is rising up the [UK] government’s agenda, a continued low interest rate environment plus the relative weakness of the currency and there are solid reasons to believe that the UK will remain attractive to global capital.”
The attractive growth potential and security of UK real estate is well recognised. As a boutique operation, we focus our efforts on domestic properties. This gives us an edge over firms that reach international markets which might dilute their focus and hands-on capabilities as a result.
Risk Level and Investment Style
We focus on value added real estate, striking a balance between risk and return. Value added projects aim to increase a property’s value through a sequence of strategic changes over a relatively short period of time (approximately 3 to 7 years).
Such projects require expert assessment and exhaustive planning in order to actualise their growth potential within the desired time frame. Value added commercial real estate promises attractive returns without high levels of risk, when executed properly.
Regional Growth Strategy
The M25 is the orbital motorway encircling Greater London. The motorway constitutes a geographic boundary line between commercial real estate strategies.
Due to the high density of established, stabilised, and relatively unchanging real estate inside of the M25, the investment opportunity is largely in core real estate. Those looking for higher returns whilst maintaining a low-moderate risk, are likely to find greater opportunity outside of the M25.
This fact is reflected in EY’s 2016 Attractiveness Survey which revealed that in 2015, London saw an increase in FDI projects of just 7%, while 8 of the remaining 11 UK regions saw increases ranging from 28% to 118%.
At Hallmark, we typically seek acquisition opportunities outside of the M25, where growth trends present the strongest potential for value added gains.
Not only is the market sentiment shifting in favour of regional assets, but our well placed network of contacts gives us premium access to this sector.
This geographic strategy gives us two advantages. Firstly it allows us to mitigate risk for clients by diversifying our holdings geographically over the entire UK landscape. Secondly, it enables us to harness national trends and value added opportunities, as explained further below.
Stacked for Gains
Our strategy for value added real estate is holistic; we seek properties that fit multiple criteria for growth potential so that we can approach each project from multiple dimensions: national trends, local trends, and property-specific opportunities. In this way, each property is fully stacked to capitalise on a convergence of untapped growth factors.
National Trends: Northern Powerhouse
Since 2014, the U.K. government has embarked on an initiative to reinvigorate growth and investment in the major cities of Northern England, dubbed “The Northern Powerhouse”.
In addition to the major infrastructure developments is the HS2 high-speed rail line which has already began construction. The HS2 will link together the cities of London, Birmingham, and Manchester.
Concurrent with the government sponsored development in the Northern Powerhouse is an influx of Foreign Direct Investment (FDI) as well. According to the Department for International Trade, “the Northern Powerhouse saw a boost to FDI projects by nearly a quarter (24%) in 2015 to 2016”.
National Trends: Leaving London
The redirection of investments outside of London follows a naturally occurring business trend and government policy to move away from London.
Many businesses and government bodies no longer need the prestige or the centrality of a London base.
They have downsized their London offices, keeping a small presence in The City and relocating their major back-office operations to more affordable areas outside the M25.
Other businesses have relocated in order to reduce their labour costs, especially with the ever advancing flexibility afforded by modern telecommunications.
Our strategy harnesses these national trends to increase capital growth, adding another layer of advantage to each property in our portfolio.
Much like a diamond, commercial real estate is multifaceted and complex. When vetting a real estate opportunity, our team leaves no stone unturned, performing rigorous research and analysis on all facets of a property. This includes engaging with our list of expert advisors to ensure there are no overlooked drawbacks to the property or its tenants.
When vetting a real estate opportunity, our team leaves no stone unturned
We further mitigate risk by diversifying our portfolio geographically and by sector. Our properties span the entire commercial landscape of the U.K., and include offices, industrial, leisure, and retail etc.
Properties in our portfolio typically have a Loan To Value ratio of 50-65%, giving us a strong margin of control over each property. Detailed and bespoke quarterly reports (accounting and management, etc.) are prepared according to the needs of our clients and/or their lenders. Sample reports are available upon request.
Our team’s due diligence, strategic diversification, and fiscal responsibility minimise risk for our clients. In this way, our clients enjoy both the financial security and growth opportunity that real estate has to offer.