Editorial & Advertiser Disclosure Global Banking And Finance Review is an independent publisher which offers News, information, Analysis, Opinion, Press Releases, Reviews, Research reports covering various economies, industries, products, services and companies. The content available on globalbankingandfinance.com is sourced by a mixture of different methods which is not limited to content produced and supplied by various staff writers, journalists, freelancers, individuals, organizations, companies, PR agencies Sponsored Posts etc. The information available on this website is purely for educational and informational purposes only. We cannot guarantee the accuracy or applicability of any of the information provided at globalbankingandfinance.com with respect to your individual or personal circumstances. Please seek professional advice from a qualified professional before making any financial decisions. Globalbankingandfinance.com also links to various third party websites and we cannot guarantee the accuracy or applicability of the information provided by third party websites. Links from various articles on our site to third party websites are a mixture of non-sponsored links and sponsored links. Only a very small fraction of the links which point to external websites are affiliate links. Some of the links which you may click on our website may link to various products and services from our partners who may compensate us if you buy a service or product or fill a form or install an app. This will not incur additional cost to you. A very few articles on our website are sponsored posts or paid advertorials. These are marked as sponsored posts at the bottom of each post. For avoidance of any doubts and to make it easier for you to differentiate sponsored or non-sponsored articles or links, you may consider all articles on our site or all links to external websites as sponsored . Please note that some of the services or products which we talk about carry a high level of risk and may not be suitable for everyone. These may be complex services or products and we request the readers to consider this purely from an educational standpoint. The information provided on this website is general in nature. Global Banking & Finance Review expressly disclaims any liability without any limitation which may arise directly or indirectly from the use of such information.

WHERE NEXT FOR UK COMMERCIAL PROPERTY?

By Charu Lahiri, Investment Manager at Heartwood Investment Management

UK commercial real estate has seen strong investment volumes over the last few years, totalling £71 million at the end of 2015. Inevitably, we are now at the later stage of the market cycle and growth in total transaction volumes is likely to level off, although market participants continue to expect volumes to stay around 2015 levels for this year.

Nonetheless, investors should reasonably expect lower yields, increased dependence on rental growth to drive returns, marginally increasing supply (in particular areas and/or sectors) and diminishing asset class relative value going forward. It seems a rather dull summation of a sector that has seen very strong growth in the last few years, but nevertheless it should not preclude investors like us from finding opportunities.  However, we will need to be more targeted in our exposure.

Where are we targeting exposure?

We continue to prefer prime offices and industrials, though have less conviction 1n the retail sector, which continues to suffer around concerns of “death of the high street”. This has been a long held view, but we are now expecting investors in the UK market to shift their geographic tilt.

Over the last few years, our portfolios have had a strong focus on developers in London and the south east. We still consider that  the central London office sector remains a robust market with demand outstripping supply, and these conditions should underpin rental growth, albeit at a slower pace than seen in recent years. However , we are also seeing more investment opportunities in other UK cities, which remain at an earlier stage of the recovery cycle, thus leaving room for both capital growth and higher rental yields.

Increasing investor confidence outside of London

One important driver for UK commercial property in the last few years has been foreign investment flows, where we are now observing shifting trends. Foreign investment has long been a key driver of London/prime real estate markets, hitting a plateau of around 70% of the central London market in 2014/ 15. While this is not expected to drop off materially over 2016 , the global hunt for yield is encouraging international investors into cities like Manchester , Birmingham, Bristol and Leeds.

In 2015, around 35% of transactions outside of London involved foreign buyers compared with the historical average around 15%- 20%.  Here again, though, selectivity is key as there is broad dispersion. For example, the take-up of offices in Aberdeen was down 50% relative to 2014 , due to the city’s dependence on the oil sector.

Property remains a core holding

More generally, UK commercial property continues to be attractively priced relative to other asset classes and we still believe it should represent a core part of a multi-asset class portfolio. Both prime and secondary property yield spreads remain elevated relative to ten-year UK conventional Gilts and UK corporate bonds versus their historical averages.

Understandably, there are concerns about the UK economic outlook and the impact this may have for the UK property market. Export activity has languished in response to global factors and business investment has slowed, which is not being helped by Brexit concerns.  These are all headwinds, but they should be countered by reasonably firm levels of private consumption. We continue to believe that UK economic fundamentals are sound, which in turn should support occupier demand.

How are we positioning portfolios?

UK commercial property remains a core allocation within our portfolios. However, following strong performance in recent years, we are looking to reduce some of our allocation to more volatile, equity-like instruments, such as developers, which have a higher exposure to retail, as well as London and the south east. Our preference is to have a targeted exposure to those sectors that we believe are best positioned for growth – prime offices, industrials and select opportunities in regional UK cities.