Yesterday CBRE reported that £6.3Bn was invested in the city office market in the first three quarters of this year which is the greatest Q1 – Q3 on record. This coincided with an article last week also produced by CBRE on long income funds stating that this sector is now worth over £25Bn, a dramatic rise since 2010. This was further reinforced - albeit to a lesser extent - by a survey undertaken by the RICS showing an uptick in investor sentiment across the country.
Notwithstanding this the UK is experiencing great economic uncertainty at the current time from Brexit to the continued recovery from Global Financial Crisis which is the longest and slowest on record, coupled with extreme volatility on the currency and stock markets.
James Fox, chartered surveyor in Real Estate at Grant Thornton, explains:
“These two contrasting elements can be understood through the inclusion of one further statistic. Over 92% of all city investment emanated from Foreign Direct Investors (FDI). Whilst in the UK we may perceive our domestic economy as being exposed to increasingly uncertain and turbulent times, it is seen within the context of the global market place as comparatively secure. This is because we have a mature and transparent real estate market place operating within a highly professional legal system capable of transacting on large lot sizes This helps set the UK apart and attract significant FDI expenditure.
However upon closer inspection these figures mask a myriad of contrasting data. These impressive headline figures focus upon prime property let to AAA tenants and being institutionally secure, they are attractive to foreign investors.
What these figures do not show is the significant variation in yields between prime and secondary properties. Investors, it would appear, would prefer to over pay for prime than risk under paying for secondary property. A philosophy known as the `Flight to Prime Principle’. The underlying reason lies with investor’s perception of risk within an uncertain global market place. Whilst it may appear odd to us, prime property within the UK is still deemed as a worthwhile investment to FDI investors within the context of the global market place. Although, this cannot be said for secondary properties which are proving harder to sell or let, as the very same articles also show an increase in stock availability.
This all points to the interesting proposition that it is not where one invests but what one invests in that matters.”