Fund Selector: A new property play

Fund Selector: A new property play

Still raw from the EU referendum, UK commercial property investment fell to its lowest level in several years during the third quarter of 2016 as investors backed away from the sector.

‘Only’ £8.7bn was invested into the asset class in the three months to September, with the average deal size falling to £13.6m – the lowest since the financial crisis. A number of significant deals fell through and properties were withdrawn from market.

An office in Wood Street, London, which German investors KanAm had been in negotiations to buy for £190m before the vote, is now being marketed again for just £180m. Not only has the impact of Brexit been felt in London, but other major UK cities have also been hit. These include Manchester, with an office block in St Peter’s Square under offer at £175m before the vote, but subsequently selling for £164m, a 6 per cent haircut.

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Investors appear to remain pessimistic on the sector, reflected by the cyclical UK real estate investment trusts (Reits) trading at levels materially below their 2015 prices. This has left several Reits – including Land Securities and British Land – trading at notable discounts to their latest net asset values (NAV).

Typical buyers, such as sovereign wealth funds, are also being hampered by low commodity prices, according to investment bank Jefferies. In a recent note, the bank said: “It now costs the equivalent of 90 barrels of oil to purchase one square foot of prime West End office space, compared with 20 barrels a year ago, which has blunted sovereign wealth fund purchasing power.”

There is a chance London could lose its status as a global financial capital, which would affect the market materially further, and much depends on whether the UK is able to maintain trade with the rest of Europe without sanction. 

It’s unknown whether prices have fallen enough to justify the headwinds London property might face. However, it is highly likely to remain a key player in the global financial markets and therefore we see attractive opportunities in the mainstream Reit market.

The current yields on offer, coupled with the discounts to NAV, will soon become too attractive to resist for many investors looking for sterling-based property. However, for those looking for property exposure without perhaps the volatility, or cyclicality of the mainstream Reit market, a new launch is on the horizon that will be targeting the social housing sector.

Through buying stock from housing associations – a sector faced with funding issues – Civitas Social Housing is looking to cash in on demand for liquidity. Housing associations with big portfolios are likely targets as they look to expand their development programmes, and need sufficient access to capital to achieve this. 

On long-term leases, the company will aim to provide investors with quasi-government backed, index-linked incomes with a yield of around 5 per cent. 

Private sector investment has long been touted as a solution to the funding issue of housing associations, and we have seen failed attempts before due to regulation, cost, and perceived risk. Let’s hope this time is different and Civitas brings a fresh opportunity to market.