LONDON, 31 July 2006 — According to a new report, published by a London-based property consultancy, the United Kingdom remains the dominant real estate investment market in Europe, including for investors from the Middle East, and the prospects for further growth in the market are good for 2006 and 2007, when the first UK REITs (real estate investment trusts) are launched.
The London-based international property consultants DTZ have just published the report entitled “Money into Property.” According to the report, the UK commercial real estate market saw net capital inflows of 69.5 billion pounds in 2005, a “dramatic increase” over the 22.6 billion pounds in 2004. The UK inflows accounted for 46 percent of total net capital flows in Europe in 2005 of 152.5 billion pounds.
The main drivers of this capital inflow are private debt and equity mainly from investors in Ireland, the US, the Netherlands, the Middle East and Germany. “The Bank of England base rate is expected to remain steady at 4.5 percent in 2006 and lenders do not seem prepared to abandon lending to real estate. The stability of the UK market is expected to continue to attract core investors and those investing primarily for wealth preservation,” says the report.
However, on investment yields, the authors also stress that with the hardening of the UK all-property initial yield at 4.88 percent at end May 2006, which is a fall of 75 basis points for the same period in the previous year, mainland Europe may offer more attractive yield premiums over financing costs. Despite this, the UK remain by far the largest and most liquid commercial real estate market in Europe, accounting for over 40 percent of cross-border investment activity and for 57 percent of gross European transaction volume in 2005.
DTZ also surveyed various fund managers in the City and abroad. The survey concluded that institutional appetite for the sector remains strong in terms of asset allocation, with insurance companies and pension funds planning to increase their exposure to the sector.
Similarly, commercial banks and lending institutions saw a 15 percent growth in lending in 2005, and DTZ predicts that this would increase by 12 percent in 2006 to 191.5 billion pounds of private debt outstanding in the sector.
Middle East investment activity in the UK is set to increase given the huge liquidity in the region due to the high oil prices and the lack of absorptive capacity of the GCC countries especially. Gulf investors, culturally, are more at home with property investment than say equities or other commercial paper, which have proven to be very volatile as an asset class in the last few years.
Middle East investment in the UK is dominated by “private and highly-leveraged investors”, including the Abu Dhabi royal family, which is the single largest Middle Eastern investor in the UK real estate market. Islamic financial institutions have also been active in the UK commercial real estate market through ad hoc transactions or real estate investment funds such as those launched by Noriba Bank; Kuwait Finance House; Gulf Finance House; Qatar Islamic Bank; Arcapita Bank; ABC International Bank and others.
In fact, another report published at the end of 2005 entitled “Shariah Property Investment: Developing an International Strategy”; which was commissioned by another London-based international property consultant, King Sturge, and endorsed by The Royal Institution of Chartered Surveyors (RICS) in London; concluded that the United Kingdom and Europe have emerged as the most-favored investment locations for Islamic and Middle Eastern real estate funds.
The report, which included surveys with leading industry players and experts carried out in conjunction with London South Bank University, stressed that 94 percent of respondents chose the UK as their most favored investment location for Islamic real estate and property funds; followed by Europe with 85 percent. The Middle East, however, came third with 62 percent.
The prospects for the commercial real estate market in the UK in the next two years are good with investors maintaining their interest, despite little anticipated rental growth especially in the London West End retail market and project tight yields until early 2007.
However, investors in the UK real estate market are attracted by the perceived wealth preservation afforded by the London commercial property market and the diversity of property investment asset classes, which include non-traditional ones such as nursing homes, medical centers, hospitals and others.
Commercial mortgage-backed securities (CMBS) is also expected to increase dramatically with 23.5 billion pounds of CMBS expected to be issued in 2006. The major boost for public equity markets in this sector, says the DTZ report, will come in January 2007 when the first UK REIT is launched.
