In our experience, buyers fall into two categories: Pension Funds, who are prepared to buy and sell prime investment stock, and other real estate investors seeking opportunities to acquire property assets where they can add value through active asset management.
Flight to Prime has been a theme of real estate investment throughout the recession - competition is very high for good real estate assets. Prime assets are generally modern, well-built properties let on full repairing and insuring terms to tenants with strong covenants. Outside of prime property, demand is considerably less, reflecting perceived investment risk and thereby price. The extent of what is considered a prime asset is a very small pool of properties and the intense demand for assets of this nature has generally kept prices at high levels providing modest net initial yields.
The view of surveyors nationally, including the London market, is that a significant amount of North West industrial stock (particularly large warehouses) is considered prime. The lack of speculative development, combined with demand from national distributors makes industrial property attractive for investors. The connectivity of the North West to other parts of the country, especially via the motorway network, keeps demand high for large sheds.
Clients are reticent to invest in office buildings in the North West, (other than exceptional properties) due to the combination of a perceived over-supply of space in the market with modest levels of tenant requirements. Due to continued volatility in the retail sector, clients are reluctant to invest in towns and cities until the market settles down.
Against this backdrop, industrial space is seen as a solid investment and clients continue to be keen to acquire such assets. There is no immediate sign of this demand cycle changing in the North West. The North West market differs from the South East where clients continue to invest in offices on the back of anticipated growth borne in both capital values and rents when the economy recovers. There is a perceived lack of supply of office space in key locations and with very little speculative development it is anticipated that there will be significant demand-led growth in rental income in this sector.
Our clients have their own funds (anything from £300,000 to £30,000,000) to invest and bank lending is not a major concern for them; their track records and modest gearing means that they can source funds for acquisitions. The biggest issue is availability of the right type of asset at the right price.
An alternative to prime property is real estate assets that can provide financial returns via active asset management. Letting voids and lease re-gears are examples, but the right type of product is not often available. We find that the impact of business rates liabilities has prevented investment because investors are conscious about assuming significant letting voids in real estate assets. This dissuades investors from purchasing such stock, as they would assume bottom line costs at day one.
We hope that as banks begin to dispose of assets and move repossessed real estate off their balance sheets, the market will begin to move, which will provide opportunities to buy assets and add value by way of active asset management.
The changes in capital allowance rules will also be a driver in altering the terms of deals. New regulations mean that the value ascribed to expenditure on fixtures in buildings incurred from April 2012 in any transaction needs to be settled within a period of two years from completion of the deal. We anticipate that parties who were previously oblivious to capital allowances claims on both sides of transactions, particularly sellers, will seek an advantageous standpoint to improve their tax position. Historically, buyers were happy to leave contracts silent and make claims following acquisition in order to benefit from unclaimed allowances. This could often provide real value to a buyer but as the position has changed, we anticipate that this will be factored into negotiations pre-contract to avoid matters being resolved post-completion. This will inevitably mean over time, capital-allowance-friendly deals for buyers should become historical.
About the author
Darren Hamer is a real estate partner with Cobbetts LLP. Darren specialises in residential and commercial development, landlord and tenant issues, insolvency and corporate reconstruction, portfolio management, property finance and investment. He likes to relax by watching sport and taking the dog for a walk.
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