Five Significant Real Estate Investment Trends

While Covid-19 has had a direct influence on specific areas of commercial real estate, it has also demonstrated the prospects in new sectors and the value of a varied portfolio, according to Executive Director Nick Terry.

The United Kingdom may have a limited geographical footprint, but when it comes to property investment, it has always been a force to be reckoned with. Indeed, the United Kingdom is the world’s third-largest real estate investment market by value, trailing only the United States and Japan.

The UK remains a highly desirable country to invest in due to its liquidity and openness, clearly defined legal framework, and historical stature, not to mention its international, business-friendly position. It has a long-standing and prominent commercial office sector, and exciting potential in logistics, data centers, and build-to-rent assets are already emerging.

However, there are obstacles. As we approach 2021, the UK, like other markets throughout the world, is experiencing harsh upheaval — from Covid-19 to fast-growing regulation. In addition, there is one challenge that will have a significant influence on the UK – the as-yet-unknown consequence of Brexit.

Despite these risks, the investment climate in the UK remains favorable. I was joined by real estate experts from the UK and Asia in our recent, ‘UK Real Estate Investment – Trends, Insights, Pros, and Cons,’ to share our perspectives on investing in UK property – from the country’s most promising commercial opportunities to significant changes in tax and structuring.

What is our conclusion? The UK still has numerous opportunities for astute investors who target the correct areas and have local knowledge.

Here are the five major themes that emerged from the discussion.

1. Investors still love commercial offices

The UK office sector, particularly in Central London, continues to be by far the largest and most appealing region for real estate investment in the UK. Commercial offices, for example, have historically attracted significant investment flows from Asia-Pacific. The UK has recently seen significant investment from China in Central London offices, and interest from Malaysia, Singapore, Hong Kong, and South Korea remains high across the area.

Of course, Covid has had an impact on the office market. Buildings are tangible assets, and investors prefer to see them in person before making a purchase commitment. As a result, persistent lockdowns have clearly impacted investor appetite.

According to Chris Gilchrist-Fisher, Senior Director of International Separate Accounts at CBRE Global Investors, “transaction volumes have been much lower.” “It is difficult for outside investors to evaluate houses while we are under lockdown. We’ve encountered a couple of cases when they bought buildings without first checking them, but that’s not usually the case.”

Gilchrist-Fisher also mentioned that many sellers were waiting to place their properties on the market in the first half of 2021. And that the market will have to wait to assess the impact of the world’s immunization programs before making any predictions about the future.

However, when things do recover, the Central London office market is expected to be the first to pick up.

In times of adversity, people frequently return to their core markets. London is one of the world’s most transparent markets, with a legal system that people trust. And offices continue to dominate the market by a wide margin. Despite Covid and other obstacles, there is still resiliency, thus there are definitely chances for investors.

2. Logistics carries massive potential

While Covid has had a detrimental influence on all real estate industries over the last year, logistics has fared better than others. Not least because the pandemic has had a profound impact on people’s purchasing habits, fueling an already rising trend toward internet purchases.

Despite the epidemic, the UK has not reached a situation of oversupply in logistics, and rental growth has remained strong. “The one market where we’ve seen some increase in capital values is logistics,” Gilchrist-Fisher added. “It’s a safe bet.”

Shaldine Wang, CEO of Elite Commercial REIT Management, agreed that logistics is still the “flavor of the month,” while highlighting data centers as another asset class that offers enticing opportunities – thanks, once again, to the impact that last year’s unusual conditions had on our demand for online connectivity. “Covid has revolutionized the entire atmosphere in which we live and work,” she remarked. “As a result, data centers are becoming increasingly appealing to investors these days.”

Build-to-rent and student housing are two more UK markets with promising returns. However, investors must be willing to put in the effort. “Those markets are more difficult to enter,” said Gilchrist-Fisher. “Build-to-rent, in particular, is an emerging industry in the UK, but there are pockets of oversupply, and rents should be monitored this year.” Investors will try to enter that market, but due to these problems, it may not be appealing to many.”

3. Fertile lands lie beyond London

Covid has had a significant influence on rental collections, particularly in the Greater London area, which has had an unavoidable impact on real estate returns. Gilchrist-Fisher stated that yields on well-located, high-quality logistics assets in Greater London, for example, might be as low as 3-4 percent. This confirms the notion that a well-diversified portfolio is geographically diverse.

Wang, as a fund manager representative, explained how her REIT focuses on a diverse geographical mix in the UK. “Because London yields are very tight, we invest all throughout the UK to generate a really competitive yield for our Asian investors,” she explained. “In Scotland, the North East and South East of England, and London.”

Outside of London, there are, of course, counter-cyclical – and potentially counter-intuitive – prospects. First, consider the investment potential of retail space for those wishing to streamline their portfolios across the country. There are some very strong towns and cities in the United Kingdom. In the South East, Guildford, for example, has a very affluent market and a booming regional shopping area that has been unfairly caught up in anti-retail sentiment at the moment.

Outside of the city, commercial office space has potential, and it would not be surprising to see life return to office parks in the regions beyond London. Following Covid, people may prefer to drive to business parks in Reading or Surrey rather than travel into Central London and rely on public transportation.

4. ESG is topping the agenda

ESG – the environmental, social, and governance aspects of investments – is becoming an increasingly important issue for investors wishing to renovate old structures or invest in new assets. Every potential new property acquisition must now be evaluated not only in terms of monetary value but also in terms of how it will be seen by the corporate entities that will lease it in the future. And investments in the United Kingdom are no exception.

“You can’t ignore ESG any longer,” Gilchrist-Fisher added. “We see corporate occupiers putting this at the top of their priority list. They’ll want to know how a certain building will fair in terms of ESG, and how it can assist them to boost their credentials as they look at their own worldwide operations.”

5. The authorities are watching structures closely

The UK government, like many others in Europe, is continuing to tighten limitations on business formation. A proposed register for overseas owners of UK property, as well as a newly imposed capital gains tax on the transfer of ‘property wealthy’ non-UK resident businesses, are among the changes. Read our overview of the capital gains tax’s effects for non-UK residents here.

Gilchrist-Fisher is optimistic that the planned beneficial ownership restrictions, which have been on the horizon for a few years, will not dissuade investors, viewing them as “another element of the process” that will harm corporate entities rather than individual investors.

Wang admitted that the new capital gains restrictions had resulted in more discussions with HMRC over corporation structuring. Nonetheless, she is quick to commend the effectiveness of the REIT model in the UK, emphasizing that additional box-ticking is not necessary. It’s simply a matter of getting the right advice before acting, she says.

“Before you go into structuring the transaction, get a specialist to advise on the broader basis for your investment,” she advises. “That is a critical component of investment in the Karaikudi.”