Commercial property in the UK’s regions is proving increasingly attractive to international investors. Far Eastern money was the first to be enticed by prospect of higher yielding assets offered regionally. Now, confidence is growing among Middle East and American funds, with two-thirds of UK real estate investment from the US said to have been spent outside London in 2018.
Research suggests that property is set to be one of the top five best-performing industries in 2020 and least impacted by Brexit. A significant proportion of real estate investment will make its way not only to key regional cities, but also to smaller cities and towns nationwide.
So, what is behind this major shift in international confidence in the UK regions?
The rethinking in regional property investment from overseas comes down to familiar market forces. Purchasing an asset in London can be prohibitively expensive. Many regional cities offer better value for money and have strong fundamentals of low supply and robust demand.
What does this look like at a granular level? A salient example comes from the Middle East-based private and institutional client base of JR Capital. In June 2019, the investment company announced the first close of a joint £100m fund with Chancerygate, having raised £25m of equity from the Middle East.
The five-year fund is specifically targeting multi-let industrial investments in the UK regions. Acquisitions have already been made in Newcastle upon Tyne and Wellingborough, Northamptonshire.
Key drivers behind this investment strategy are that multi-let industrial property is very affordable for occupiers and offers excellent income returns to investors. It also benefits from a well-diversified base of tenants. For overseas investors looking to invest in commercial property in the UK in today’s uncertain environment, this highly defensive strategy generating strong cash on cash returns is very attractive.
Many secondary towns across the UK have seen very low levels of new industrial development for a number of years at a time when existing floorspace is being lost to higher value alternative uses, such as residential. Strategic locations near to regional hubs and transport networks have been undersupplied with investment and new development, causing a lack of supply in small to mid-sized industrial units across the UK.
Undersupply is only one side of the coin. The other is high demand from businesses of all shapes and sizes, accentuated by structural shifts in consumer behaviour.
The continuing trend towards e-commerce is driving more demand for urban and last-mile logistics space across the UK regions, particularly from small and medium-sized businesses, reinforcing the strong investment case for this type of commercial property.
This dynamic has driven more overseas investment into industrial property in the UK regions, such as from US-headquartered real estate firm Hines which recently entered the sector. In September 2018, the firm launched a joint venture with Chancerygate to target prime regional sites with high-quality urban and last-mile logistics developments. This is a strategic diversification beyond its core prime office portfolio and follows its prior investment regionally into student accommodation.
The joint venture has since acquired six sites worth £107m across around 749,000 sq ft of space, located in Beeston, Nottinghamshire; Birmingham; Bournemouth, Dorset; Cheltenham, Gloucestershire; Warrington, Cheshire and Tonbridge, Kent.
Over recent years, it has been impossible to miss the rising trend of high-profile occupiers relocating to, or opening significant hubs in, the UK regions.
In Nottingham, global technology giant GoDaddy recently took a ten-year lease at an 85,000 sq ft office building managed by Chancerygate. The company, which employs 9,000 people worldwide, already has three UK offices in and around London – in Slough, Hayes, and Woking – and it is no coincidence the latest move is to bolster its Midlands operations.
Every high-profile announcement like this generates further confidence in the region, creating a halo effect for local suppliers and complementary companies. This, in turn, means commercial opportunity for investors.
This focus on regional hubs is driven by affordability, labour availability and revitalisation of city centres which have significantly improved their appeal.
Beyond the big-name tenants in regional offices, lesser-known occupiers in UK regions are also motivated by new, high-quality commercial property. Light industrial units may attract diverse businesses from a small manufacturer or retailer, to a national trade counter operator, logistics group or car dealership. For investors, this provides a granular and diverse tenant base which reduces risk.
The conclusive outcome of the recent general election is likely to drive significant Central Government spending in the regions, this coupled with the real estate fundamentals of undersupply and high tenant demand will give confidence to US, Middle East and Far East investors to invest into the UK regions.
Chancerygate’s asset management team manages a diverse £220m portfolio of assets with more than £14m in rental income. Its industrial, retail, office and leisure assets span 4.9 million sq ft across 355 units from Aberdeen to Southampton. To view our full portfolio, visit our asset management page.