Overseas Buyers Poised To Ignite UK Commercial Property Market
October 29 2009 - 1:16PM
Dow Jones News
The U.K.'s commercial real estate sector could be gearing up for
fierce competition from buyers as funds, expecting more distressed
property to come to market in the next two years, plan to snap up
prime properties in hope of a recovery.
The market offers the potential of lucrative returns for
overseas investors, in particular.
"The U.K. is attractive to overseas equity as values have fallen
45% peak-to-trough" and sterling has lost ground this year against
major currencies such as the U.S., the euro and the yen, said James
Thornton, founder of Mayfair Capital Investment Management, adding
that "it makes for a very liquid market."
Thornton said he saw U.S. and Japanese investors returning to
the U.K. market, as well as German open-ended funds, which
traditionally have been prominent U.K. real-estate buyers.
According to CB Richard Ellis, 82% of the investors in the
Central London office market in the third quarter were
international, with U.S. buyers the most active, dominated by
Blackstone Group LP’s (BX) acquisition in September of a 50% stake
in British Land PLC's (BLND.LN) Broadgate Estates for GBP77 million
plus the assumption of GBP987 million of debt.
German investors were the second-largest cross-border buyers in
the quarter, having been relatively quiet since the last quarter of
2008.
Mayfair Capital recently has teamed up with Dallas-based
property fund manager L&B Realty Advisors, which manages $4
billion of U.S. pension funds, to invest $250 million of equity
from U.S. institutions into U.K. property over the next two
years.
BNP Paribas Real Estate, the property adviser, said that planned
new opportunity funds formed this year could have almost GBP18
billion to spend globally on commercial property, and GBP5 billion
of that may be targeting property in the U.K.
German open-ended funds currently hold around EUR18 billion in
cash or immediately liquid assets, of which up to EUR7.5 billion
could be available to spend on real estate, according to property
adviser CB Richard Ellis. If fund inflows continue as expected,
they could have as much as EUR12 billion over the next two
years.
Most of the opportunity funds were launched in the third quarter
of this year, signaling hopes that the U.K. market has reached a
bottom, but so far they have been chasing prime property only.
The U.K. commercial property market has been hit the hardest and
fallen the fastest in Europe as a lack of debt financing caused
declines in values and damped sales. While prices are beginning to
rise again, vacancies still are high, subduing rental values.
BNP Paribas Real Estate is planning to launch a U.K. property
fund for institutional investors, which is targeting GBP150 million
of investment in commercial real estate by the end of the year
while Aviva Investors, part of insurance group Aviva PLC (AV.LN),
which manages GBP222 billion in assets, said its pooled property
fund has returned to the market and is looking to snap up
real-estate investments.
Aviva is planning to buy prime property, with secure leases and
with strong covenants, across the U.K. and will focus on retail
warehousing, high-street retail and supermarkets, with lot sizes in
the range of GBP10 million to GBP30 million.
BNP Paribas' senior director Martin Francis said the property
fund would aim at buying assets with good property fundamentals,
which are more resilient as rents come under pressure.
But since prime and cheap property is limited, investors are
waiting for distressed assets, under foreclosure after owners
failed to meet lending or interest commitments, finally to come to
the market on a larger scale.
"We also expect more assets to become available as banks reduce
their property exposure on their balance sheets and from corporates
looking to do sale-and-lease backs," said BNP's Francis.
Thornton said, "The risk appetite returned for all classes, but
demand is only there for prime assets." He added that he saw good
opportunities in property in prime locations but with shorter
leases and, therefore, considered secondary, or less
attractive.
-By Anita Likus, Dow Jones Newswires; +44 20 7842 9407;
anita.likus@dowjones.com