There is a murmuring from investors suggesting that we are reaching ‘the top of the market’ and that the commercial property market is ‘over heating’. Our feeling is that it is a competitive market but still room for potential and there remains good opportunity for investors to acquire attractive yield in the commercial property sector.
During Q1 2018, the North West region generated in excess of 54 commercial property investment transactions, totaling over £800m and producing an average weighted yield of 6.05%. When compared with the previous years’ quarter, Q1 2017 figures showed less value in transaction volume at £407m, but at a lower, sharper yield of 6.00%.
The institutional tap has certainly been turned on in the North West, and this is a positive sign for commercial property in the region. Institutions have been involved in over 50% of the Q1 2018 transactions in the North West and this will continue to progress throughout the year, with many institutions still hungry to deploy capital here.
A stand out story for the North West, and one that fully supports that there is still value to be gained from the region, is that of India Buildings in Liverpool. In January 2016, Shelborn Asset Management acquired the 350,000 sq ft building for £17m. The building was part-let and income producing, but the tenant was to vacate. The owners were seeking to add value by gaining a change of use from offices to residential, which would have trebled the investment return. However, HMRC GPUT had a requirement in Liverpool, and subsequently agreed a new 25 year lease to take over the whole property. In March 2018, just 2 years after the initial purchase, Shelborn Asset Management sold the investment to Legal & General Property for £125m – a healthy return of £108m before costs.
Breaking down the sectors, and analysing the Q1 2018 investment transactions, the most popular sector was offices, with a total of £323m being spent in this sector. Second, was leisure at £190m and third was alternatives (including residential PRS / student accommodation) at £123m.
In our experience the lack of open market investment sales is leading to an increased number of investors per asset opportunity and therefore a more competitive situation, in some cases leading to yield compression. This is notable on prime assets which appear to be few and far between in the open market. The number of local authorities also spending large amounts of money with little effect on borrowing has also distorted the market to an extent, but these are unique situations which will soon be controlled through the Local Authority Investment Code.
Wildbrook CRE have the ability to source deals and transact off-market, providing reduced time pressure and the ability to undertake thorough due diligence. It has been a very bright start for us and we aim to continue this trend throughout the rest of 2018 and beyond.
For the private investor, there is still a very good opportunity to acquire assets providing net initial yield returns of 7% plus, within the commercial real estate market. Wildbrook CRE have recently been involved with the acquisition of an industrial investment of sub £500,000 lot size, generating a 7.65% net initial yield. We acted on behalf of a private SIPP investor, and this was the sixth transaction acting for the same client. Earlier in the year we were able to negotiate a rent review on their behalf, as part of the asset management strategy within the portfolio, to look to increase rental income where possible.
Wildbrook CRE have now been instructed to approach a tenant within the portfolio, as their lease is 2 years from expiry. The intention is to negotiate a lease extension to secure the income for a longer term.
There has been a flurry of sale and leaseback investment opportunities of late, where owner occupiers have been looking to release capital through a sale of their existing business premises, with the owner then taking a lease on the date of completion. This has been favoured by some business owners who can see that the market is favouring the seller at the moment and an opportune time to experience the yield compression taking place within particular market sectors. Wildbrook CRE are always looking to open dialogue with similar business owners, in conjunction with Cowgills, to see where we may be able to add value and see an opportunity.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.
Disclaimer
The information was correct at time of publishing but may now be out of date.
