Commercial property investors range from UK institutions to listed property companies, private property companies and indeed private individuals.
Much as you would contemplate the purchase of shares, property investors will generally look for a mixture of capital growth and yield.
They will often expect performance to come in over a specific period – possibly short term (looking for an exit within three years) or take a more long term view that reflects developing trends in the market.
When you buy a share you choose a company perhaps because it is good in its sector or has a persuasive brand. Commercial property investors choose a property having regard to the fundamentals of location and specification, but also the type of and specifics of the occupying tenant, because ultimately it is the occupier that drives the market.
To give some idea of the scale of UK property investment activity, the first quarter of 2011 recorded about £8.40billion in transactions – a 10 per cent fall from the previous quarter, but some 16 per cent up on the same quarter last year.
For the entirety of 2010 total transactions were about £35.3billion which contrasts with £67.1billion at the peak of the market in 2006.
Why is this relevant? Property is a fundamental factor of production. Investment often regenerates or refocuses property. Most of us have some reliance on property investment either directly, or because our pension fund has a component of its funds invested in the commercial property sector or in organisations that feed off it.
Property is vitally important for the UK services sector creating significant income streams for solicitors, accountants, agents, brokers, architects, builders and (if I dare utter the word) banks. It may well be the resurgent property sector that has fuelled the 24 per cent of business and professional service organisations telling the CBI that they expect to expand in the next 12 months.
Over the last two years it was anticipated that the market for investment property would be flooded with assets. However, this trend did not emerge because beyond Central London few banks or UK institutions completed any large scale disposals.
The counterpoint is that investment demand is relatively strong, driven by both institutions and also overseas buyers, while the public company sector is again becoming increasingly active.
As a consequence, there is a limited availability of prime stock which has necessarily seen prices rise as yields have contracted.
It is likely that this will push investors to increasingly look at good quality secondary assets although this should not be interpreted as a renaissance in investment activity for lower quality stock where the issue of debt (i.e. a lack of it) remains paramount. By secondary I really mean less prime.
There are, of course, many conflicting signs within the wider UK economy.
UK unemployment fell 88,000 in the three months to April, the biggest drop since the summer of 2000.
However, retailers report that sales in May fell 2.1 per cent compared with a year ago. The recent Markit/SIPS UK Manufacturing Index (PMI) tells a story of UK manufacturing growing at its weakest pace for almost two years.
All of this makes it extremely difficult for those more qualified than I am to read the tea leaves of the economy. However we can anticipate a relatively low interest rate/high inflation environment, meaning that investors have to chase inflation-busting total performance and that blend of capital growth and yield that property offers is consequently attractive.
If I was to guess where property investment might start to focus then I would point to the logistics and industrial property sector, because there remains an expectation that manufacturing exports will drive GDP growth over the next two years.
Thus it seems reasonable to expect that logistics and industrial property occupiers will strengthen their businesses. In turn, markets that have good connections to the core national transport network and to the major consumer markets such as the South East and East Midlands are likely to be particularly favoured.
This is good news for Milton Keynes for example, which scores highly on all the check lists – located in the South East, great connections, and a strong industrial and logistics sector.
It is also possible that investors may find it slightly easier to get into property as the year develops. We expect that the number of properties released by the banks will increase in the second half of the year due to both high holding costs and the polarised growth of capital values.
NAMA (National Asset Management Agency) has already announced its intention to aggressively step up sales of property backed by non performing Irish loans.
Since the nadir of the market at the back end of 2008 and early 2009, property has steadily increased in terms of its attractiveness as an asset class. It matters that it performs, because at some level property investment underpins the wealth of us all.
Lambert Smith Hampton publishes a quarterly survey of UK Investment Transactions (the UKIT report). For further information on UKIT and Lambert Smith Hampton’s Property Investment Division, visit www.lshinvestmentsales.co.uk, or phone me on 01908 604630.