Investment in UK commercial property hit a high watermark in 2014 with £70.7bn traded, according to CoStar’s newly released Q4 and 2014 UK Investment Review, writes Francesca Cooke.
This made it the highest annual volume since records began, outstripping the previous high of £67bn set in 2006.
Several key themes played out over the year, including the shifting of capital into the regions (and the subsequent narrowing of the London-region yield spread), the growing popularity of portfolios and the industrial sector, and the continuation of the love affair between foreign capital and UK property.
In 2014, there was a clear resurgence in the regional investment market as economic growth finally radiated out across the UK. A much improved employment outlook combined with attractive pricing relative to London lured investors, particularly UK institutions and US private equity firms, beyond the capital.
In London, investment increased 6% year-on-year to £27.9bn in 2014, but outside the capital volume rose 52% to £27.5bn (the £15.3bn balance is comprised of multi-region portfolios). Indeed, for the first time since 2009, non-London investment broadly matched London investment, and the yield gap between London and the rest of the UK narrowed accordingly from its Q3 2013 high.
Industrial gains in popularity
Offices remained the dominant sector in 2014 with 43% of total volume (up 23% year-on-year to £30.5bn), but this was down from 46% in 2013 and 49% in 2012 as other sectors – most notably industrial and alternatives – became more popular. Despite a resurgent shopping centre market boosting retail investment, industrial was the big climber of the three main sectors. Industrial investment totalled £8.2bn over 710 transactions in 2014, a rise of 57% year-on-year and more than double the five-year average.
Foreign capital swoons over UK CRE
Comprising 40% of investment, £25.4bn of international capital was invested in the UK, a 25% increase from £20.3bn in 2013. North America was the leading origin of overseas capital, in contrast to 2013 when Asian investors dominated the foreign investor roster.
On a country-by-country basis, the US retained its title as the top foreign investor in UK CRE – with investment more than doubling to £10.1bn, largely thanks to some significant portfolio deals – followed by Kuwait and China in second and third place respectively.
2014 moved the goalposts
Looking ahead, the benign macro environment that made UK property such a roaring success in 2014 is still very much in place, but the market will be coming off a year of soaring investment and re-pricing. The outlook remains positive, but finding assets that fit the bill will become increasingly difficult, and investors will need to target rental growth and value-add opportunities as a means of driving total returns.
For the full information and analysis on these key themes, including yield trends by sector and region, the investment breakdown by region, a special feature on 2014 in review and the outlook for 2015, please click here to request a copy of CoStar’s Q4 and 2014 UK Investment Review.
The report is based on the analysis of 3,885 UK 2014 investment deals, the largest pool analysed by any information provider. CoStar can achieve this level of comprehensiveness by employing the UK’s largest CRE research team. Over 120 qualified researchers regularly contact agents, investors and owners across the UK, making over 125,000 calls per year to verify the information.
Once verified, our data is available to clients via our flagship product CoStar Suite – providing access to building and deals information, market analytics and news.
Francesca Cooke is a market economist for CoStar Group UK