International property investors should beware London traps, says Riverside Capital’s Dominic Wright
Dominic Wright, chief executive of property investment management company Riverside Capital, says that overseas investors buying UK commercial property need to beware the traps that may exist.
Overseas investors looking to buy into the UK commercial property market are entering an extremely popular market and without proper knowledge and guidance they can find their investments have not been best placed.
Considered a safe haven, the London property market in particular has seen massive levels of investment in 2012 – around £16bn. Compare that to less than £4bn going into the New York property market in the same time frame and it provides a clear indication of just how attractive a location London is for overseas investors.
This brings with it particularly problems for investors who do not know the market who should be wary of making a purchase without conducting proper due diligence on the property, the location, the current and future yield and the potential growth in the asset.
Location can be a major trap for the unwary investor. The huge demand for London property has seen very many investors steered towards the City of London to invest. At face value there is logic to this, since the City is the hub of the financial district. But the City is a cyclical market where building supply is not constrained, so timing can be critical. During the past 25 years the supply of office space in the City of London has grown by around 60%.
Compare that to London’s West End, where there are tighter building regulations and planning laws and the supply has increased by just 16%. As a result, and combined with a more attractive physical landscape, rental levels from properties in the West End are higher and more stable than in the City, and as such yields should in theory be lower by a wider margin than they currently stand.
But it’s very difficult to buy in the West End, which has seen investors head towards the City as an alternative. Currently, yields for core City stock are at similar levels to the West End. In our view those low yields are likely to be difficult to maintain for City properties in the longer term as rental growth prospects are not as obvious as in other core London markets.
There are good opportunities in the City but stock selection is more crucial now than ever, and buyers have to consider the many different elements, like those mentioned, pre-purchase.
Simply entering the London property market and buying in the current boom may work in the short term, but there are inherent dangers and a more tailored approach that assesses the ultimate objective of the investment – whether that is wealth preservation or wealth creation, or both – as well as risk management, should be used to determine the property purchase. Ongoing asset management is also essential to preserve and grow its value.
London’s central geographical location and time zone between Asia and America, its doorway into Europe, its reputation as a leading financial centre as well as being a safe haven for overseas investment, are attracting increasing amounts of cash into the property market. Notably, in 2012 this trend was largely fuelled by equity over debt-backed buyers, which has been driving up values. We remain bullish on the London market as a result, however, once you start to analyse the fundamentals, there are some areas where there is potential overheating and investors need to take considered advice to ensure they do not get caught out by their purchases a few years down the line.
Likewise, there are good opportunities outside of London, particularly for long income-producing assets, where there is a long lease held by a good tenant. However, there will be a big yield differential between the two as London is a world class city compared to even some of the largest cities in the rest of the UK, and investment in these areas requires a completely different set of considerations.