Northern uproar

Yields have declined in UK cities recently - but that could be about to change.

London is so vast, both physically and economically, that it tends to rather dominate the international image of the UK. This is no less true in real estate, where the UK's key investment markets are generally seen as the City and the West End. But outside of the capital, the country also has a number of medium-sized regional cities with their own healthy property investment markets.

As investor capital floods into these cities, yields in most markets have slipped slightly over the last couple of years. “It's the pure pressure of money,” explains Peter Layburn, a director at research firm DTZ. “There's more cash in the market than product to spend it on, and the competition is driving yields down.”

While there is a significant amount of available office space in these regional markets, little of it is of prime quality. What's more, much of it is leased but remains unoccupied: Layburn cites the example of an IT company that increased its lease from 30,000 square feet to 1.3 million square feet between 1995 and 2001 on expectations of growth that never came.

“A huge chunk of space on the market is poor quality and second hand, and tenants want new space,” he explains. “So while we're not there yet, we're not far from the next development cycle.”

But new supply will take a year or two to come online – and the upside of the current shortage for investors is that rents across the board look to be on the rise. Manchester, for example, is the only city that has seen significant rent increases in recent years and although some new schemes are expected to be completed over the next couple of years, further rental rises are expected. Birmingham, where rents have held steady at around £27.50 per square foot for the last two years, also suffers from a supply shortage, making further rental growth possible.

In Scotland, although both Edinburgh and Glasgow have seen a decrease in available space, the situation is more serious in the former. Edinburgh is a small city, with a well-preserved city center, making land scarce. As a result, it has the least supply of all the UK's regional cities – and analysts have described rental increases from the current level of £26.50 per square foot as a certainty. Rents in Glasgow, larger and more earthy than the genteel Scottish capital, have hovered for some time around £23.00 per square foot – but here too, increases are widely predicted to be on the way.


Macquarie plans Asia trusts
Australian investment bank Macquarie reportedly plans to launch two real estate trusts in China, as well as three additional Asiafocused infrastructure and real estate vehicles. Following the acquisition of nine malls in China for $93 million (€77 million), the bank plans to list them in a real estate investment trust. Macquarie also plans to list a Hong Kong REIT sometime in early 2006 via its Macquarie Goodman Group. Macquarie is also a financial sponsor of the Prime REIT, which was listed in Singapore in September and owns two properties along Singapore's Orchard Road shopping strip.

London Asia, Consensus form RE services group
London-based investment bank London Asia Capital announced plans for a joint venture project with Consensus Business Group, the private investment firm owned by real estate tycoon Vincent Tchenguiz. The company, called LAC Consensus, will provide financial services across China and South-East Asia, including under the banner of storied estate agency Chesterton. The new shop will reportedly make investments in commercial and residential real estate in China, provide early-stage capital for companies and offer services to the relatively underdeveloped Chinese real estate market.

Carlyle, SAIF see value in Chinese realtors
Global private equity firm The Carlyle Group and Hong Kong-based private equity firm SAIF Partners have jointly invested $45 million (€37 million) in real estate agency China Real Estate Network, a subsidiary of China Real Estate Group. The Tianjin-based agency group reportedly has around a 30 percent market share of the Chinese real estate market. The investment will go towards helping the agency expand, as well as prepare for an initial public offering in the US planned for 2007. Carlyle invested $15 million in the company for a 7.5 percent stake, while SAIF made a $30 million investment from its SB Asia Investment Fund II for a 15 percent stake. SAIF closed the fund in May with $643 million in commitments.

GIC looks at Bangalore developer
The Government of Singapore's investment arm (GIC) is reportedly set to invest around $100 million (€83 million) in RMZ Group, a Bangalore real estate development firm. The institutional investor is reportedly planning to invest through a special purpose vehicle and take a minority position in the developer, according to local news sources. RMZ has developed more than 6 million square feet of office space since 2003 and currently holds office properties such as RMZ Futura I, RMZ Futura II and RMZ Getaway in Bangalore, in addition to office developments in Pune, Chennai and Hyberdad. GIC's real estate head recently said that the investment arm is looking to diversify its property holdings in response to increased interest in the real estate sector.

Asia Pacific investment increases 74 percent
In the Asia Pacific region, real estate investment increased to $48.3 billion (€40 billion) in 2004, an increase of 74 percent over 2003, according to a report published by real estate services and management firm Jones Lang LaSalle. Around 24 percent of the increase came from crossborder investment, which increased by 146 percent to reach $11.5 billion last year. North American investors accounted for much of the cross-border activity, trading $5.1 billion in assets and investing $0.7 billion in the Asia Pacific region, while Europe remained the most active market for cross border investment. The report also found that the office sector represented 59 percent of all global capital flows and total global real estate investing reached $0.5 trillion in 2004.