Middle East invades the UK High Street

Middle East invades the UK High Street

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Overseas investors account for 30% of the total commercial property purchases in the UK

Public interest in commercial property investment has soared in recent years and is expected to increase more, according to the Royal Institution of Chartered Surveyors (RICS) annual commercial property forecast published this month.

With total returns in 2005 close to 20% for the second consecutive year, commercial property continues to attract individual private investors.

But RICS forecasts a decline in commercial property returns in 2006 and 2007 – 17% and 9% respectively – as a result of a slowdown in purchaser activity. This is expected to be partially offset by increased interest from private individual investors.

Overseas investors have been in the driving seat in 2005, accounting for around 30% of all UK commercial property purchases, amounting to the tune of £15bn. Buyers from the Middle East have been active as rising oil revenues pushed up their spending power.

Domestic institutional investment remained strong in 2005, representing £11bn of all direct commercial property purchases last year, though net investment receded to £2bn after peaking at £4bn in 2004.

Last year also saw the return of equities as the frontrunning asset class with returns outstripping those of commercial property for the first time since 1999.

But the advent of UK Real Estate Investment Trusts (REITS), given the green light in the recent Budget, is expected to further entice retail investors into commercial property funds through tax sheltered personal finance vehicles, such as Individual Savings Accounts (ISAS) and Self Invested Pensions Schemes (SIPPSs).

Chartered surveyors, who, in a recent Rics poll said that the changes could not affect the market place nor appetite for commercial property in pensions plans, dismiss suggestions that a tightening of the borrowing rules governing Sipps could hurt the investment market.

Rising global interest rates likely to temper foreign investment demand

A rise in interest rates globally is expected to mitigate some of the impetus to the commercial property investment market from Reits. Demand for commercial property is expected to slow gradually over the next two years, as rising public investment, along with demand from institutional investors will partly offset a likely drop in foreign investment demand as the cost of funding for these overseas investors rises.

Office rental market set to outperform in 2006 and 2007
UK commercial rents have fallen by almost 9% since the stock market peak in 2000, while commercial values continue to rise – 12.8% in 2005, the largest recorded increase since 1988. A continued recovery in the office market will enable rents to rise, while retailers and industrial firms are expected to see a softer rental picture due to a moderate domestic climate, forcing them to focus on maximising efficiency rather than physical expansion. Rics expects rental growth to be strongest in the office sector, reaching 4.4% by the end of 2007 and retail growth to halve to 2% over the same period. Industrial rents are expected to experience marginal falls.

Investment in commercial property has more than doubled in the last five years from £21bn in 2000 to £50bn in 2005. The largest increases in activity have been in the last two years, coinciding in the biggest rises in commercial property values since the late 1980s property boom.

Rics economist Oliver Gil-martin says: “The doors to commercial property are opening up to a much wider audience and individuals are beginning to appreciate that this kind of investment can generate income, whilst exposing them to comparatively reduced risk. We are seeing a rush into tax sheltered savings plans from those wishing to diversify their portfolios and spread their investments across different asset classes and geographical areas.”

“However, while the next two years will continue to see healthy returns for investors in UK commercial property, some will be disappointed if they are expecting the kind of stellar performance experienced in the last three years.”

Commercial property auctions warning
Around £2bn of UK commercial property went under the hammer last year, but experts are warning that private investors must beware of diving in. Low interest rates, the thrill of the chase and a red hot demand for alternative property investments means there is a booming trade in the UK for commercial space. Busy auctions are often held at hotels and the lots up for sale include shops, offices, industrial estates and a range of other buildings.

Peter Flemming, head of property at the law firm Betesh Fox, says private investors must be streetwise to avoid getting stuck with a bad deal: “Private investors need to make sure they don’t get their fingers burned at these auctions. Few people who make a success of this are rookies. Most investors have large portfolios where they can spread the risk.

“Smaller investors must beware that acceptance of a bid creates a legally binding contract and they must pay a 10% deposit. Doing your homework by inspecting the seller’s legal pack prior to the auction is crucial if you don’t want to end up in trouble. Property is usually “sold as seen” which means a buyer will inherit any problems it may have. Buyers are also asked to pay the balance of the purchase price within a month, so funding must be available.

“With commercial property, it is important to calculate the length of time left on the lease and work out what sort of return you will get. If a tenant quickly vacates the premises, it could prove hard to find another tenant. If the tenant goes bust, you may also have problems. Developers with years of experience often face these pitfalls, and it’s not for the faint-hearted. Getting professional advice is vital.”

Clive Gawsthorpe, tax partner at national accountancy firm UHY Hacker Young, says there are tax advantages to owning commercial property: “Tax breaks are available for commercial property owners in certain areas and it is worth knowing where savings can be made. For example, capital allowances are the main difference and property buyers quite often forget these when purchasing. The vehicle used to buy the property, whether through an individual, a partnership, limited liability partnership or a limited company has tax consequences. Mistakes can be costly.”

Bank of Scotland in £255m property deal

Bank of Scotland Corporate’s Joint Ventures team has secured a 44% stake in private property investment and development company Credential Holdings, based in Glasgow. The deal has an overall value of £255m, and Barrie Clapham, developer and entrepreneur, will retain 52% of the company.

Credential Holdings owns and manages a substantial portfolio of investment properties, valued in excess of £160m. This includes 450,000 square feet of retail, commercial and leisure space and £50m of residential property currently under development. This deal will enable the company to make further property acquisitions, consolidate its core regeneration property development work and spur growth in its newly established new build division.