Last year saw record foreign investment in UK commercial property but a sharp slowdown in the second half of the year will make 2016 more of a challenge, a new analysis suggests.
Some £67.5 billion was invested in UK commercial real estate in 2015, a 5% decrease on the record of £70.7 billion invested in 2014, making it the second strongest year on record and 46% above the 10 year average, according to the latest research from CoStar Group, a commercial property information provider.
omentum slowed sharply in the second half of the year, with investment down 19% from the previous year. The firm says that this reflects the fact that investment activity has been especially strong over the previous 18 months and good opportunities are harder to find, but also that increasing global economic and political uncertainty is impacting investment decisions.
Nevertheless, 2015 was a strong year for the UK's big six regional cities. Office investment increased 16% to £3.2 billion, which is the highest level since the recession and more than double the eight year average. Foreign investors seeking standing assets and development opportunities underpinned much of this investment.
Foreign investment into the UK totalled a record £27.8 billion in 2015 a 6% increase on 2014’s £26.2 billion. International capital accounted for 45% of the total volume of transactions, with investment into the UK being spearheaded by the US with a total of £11 billion.
But the report shows that investment into UK commercial real estate from the Middle East dropped dramatically by 62% to £1.6 billion, the lowest level since 2012, and it says that this is largely attributed to the collapse in oil prices and the political uncertainty in the region.
In contrast, Far Eastern investment increased by 62% in 2015 to £6.4 billion as investors from Singapore and Hong Kong in particular flocked to the relative safe haven of the UK.
‘Despite it being a record year for international capital investing in UK commercial property, we have started to see signs that the market is slowing down. Total investment in the second half of 2015 was down 19% compared to the second half of 2014,’ said Richard Yorke, director of market analytics at CoStar.
‘With 2016 beginning with severe stock market volatility, heightened worries about China’s economy, falling oil and other commodity prices, and uncertainty about the UK’s place in the European Union, total investment may continue to ebb,’ he added.
The report also shows that demand for alternative assets such as hotels and students accommodation rose strongly in 2015. A sum of £5.5 billion was spent on hotels in 2015, a 47% increase on 2014 making it the strongest year ever. In addition, £4.3 billion was invested in student accommodation, more than double the level invested in 2014 and the strongest year on record.
In terms of sector, offices dominated with £29.5 billion spent although this was a 5% drop from 2014. Overall, the three main property types, offices, retail, and industrial all experienced lower volumes, with the proportion of investment going into the retail sector well down on the eight year average.
On a region by region basis outside London, the South East and North West were the biggest recipients of foreign inflow with £1.4 billion and £0.8 billion invested respectively, with foreign investment in both regions trebling year on year.
In terms of overall volumes, the North East experienced the biggest annual increase at 32% with Wales up by 20%. In contrast, investment into Scotland fell by 41%.
‘2015 has been a buoyant year for UK commercial property investment. Yields have come in sharply making property increasingly expensive and difficult for investors to find value, especially in London where several key deals fell out of bed in the latter months of 2015 resulting in lower investment levels,’ said Yorke.
‘In addition, the increasing global economic headwinds will likely impact investment, especially that originating from oil and commodity exporting nations. However, as the data shows, the UK still remains a highly attractive place for commercial property investment. Its scale and liquidity is hard to match,’ he pointed out.
‘Although 2016 is likely to be a more challenging year, our clients report that investors will continue to target new opportunities in the big six and other regional cities,’ he added.