Is this the new normal?

31 July 2017

Jamie Thain and Will Sandwell on the enduring appeal of bricks and mortar in uncertain times.

It is fair to say that Brexit is the focus of most economic and market commentary at present - and for good reason.

It will be some years until we see the final result of triggering Article 50 and, yes, that creates uncertainty in the markets affected, but as John Lennon once said: "Life is what happens when you are busy making other plans."

It seems that for a decade now we have been living against a backdrop of one event or another creating uncertainty: the global financial crisis, the Scottish Independence Referendum, the General Election; the Scottish Elections, the EU Referendum, the US Presidential Election; the triggering of Article 50, the prospect of a second Independence Referendum in Scotland, and most recently on June 8, another General Election.

Is this the new normal? It feels like it, at least for the foreseeble future. Despite this, property remains a fundamentally safe asset class, providing strong income returns and, in many cases, secure long-term capital preservation. These characteristics of property remain true whilst bond yields and returns on cash are at historically low levels. Property risk premium is now evident and therefore bricks and mortar are an attractive prospect.

Investor preferences may change over time as a result of continued political and economic uncertainties. Many investors, and in particular institutional investors, are now taking a more cautious approach to risk. This has led to a significant increase in demand for properties providing long secure income streams, resulting in increased competition for a limited number of assets and inevitably continuing yield compression in this area. Opportunities in logistics, alternative and PRS (Private Rented Sector) are favoured.

Conversely, those investors who are seeking yield through adding value, such as well-funded property companies, may have a bit less competition to deal with. Multi-let industrial, office repositioning opportunities and strategic development can provide this.

For private investors in the sub-£5 million category, competition can still be fierce for quality assets for which debt is easily accessible.

Transactional volumes over the last 12 to 18 months are down. However, this is largely due to lower stock availability/liquidity rather than lack of investor appetite for the sector. 

A slower, more selective development market has led to a lower level of development pipeline across the traditional sectors than we have seen in the past, and this is helping to support rental levels in the occupational markets.

The drop in value of Sterling has made the UK an attractive investment proposition for overseas buyers. Many of these investors operate on a global scale and see the UK - despite, or perhaps because of, the current environment - as good value, underpinned by a stable and transparent political and legal system when compared to many other areas of the world.

The fact is that different investors have different drivers, such as attitude to risk, sector or locational requirements, target lot size, return requirements and so on. And these drivers are not always the same; they can change over time. The fund manager responsible for a £2bn portfolio will have a different investment rationale to the entrepreneur who has sold a business and wants to deploy £5m of equity into a single asset. Equally, the private individual who has £1m of savings to invest on a long-term basis will often be more cautious than the asset management specialist who only buys high yielding multi-let property and never aims to hold an asset for more than 3 years. 

So, life still goes on in the market, and, while we must pay close attention to the political and economic situation as it evolves, good fundamentals and good stock selection remain the keys to a successful investment.

Whatever type of investor you are and whatever your attitude to risk now more than ever it is important to seek considered professional advice. The investment team at Galbraith advises a broad range of investors and maintains a 100% client-led approach to investment agency. We have a strong track record as multi-sector advisors and will continue to identify opportunities for clients within a market, which still offers some exceptional prospects. We would be delighted to hear from you if we can assist in any way with your requirements.

 

Jamie joined Galbraith in 2017 and is a partner in the Commercial Investment Team. He has an in depth knowledge of the UK commercial property investment market and has been involved in numerous significant transactions throughout his career.

Will joined Galbraith in 2017 as an associate in the commercial investment team. He has 10 years experience advising institutional investors, banks, property companies and private investors across a range of assets. Will is one of the most active investment agents within the Scottish industrial market.

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