On a recent trip to Argentina during the week that Margaret Thatcher passed away, a question that arose was ‘What is the UK good for?’ The meaning behind the question was to determine what Britain produces, and it was a fair question coming from a country famous for beef and vino tinto. Actually, it is a question that fund managers in the UK have to ask themselves these days, given that London real estate looks expensive.
Given London’s constrained development characteristics, along with being a place where people want to live and work, it is no wonder so many core buyers have flocked to the city, pushing up prices. As a result, those seeking core-plus, value-added or higher returning strategies are looking to other parts of the UK.
The trend towards the regions already might be evident via research. Central London investment volumes dropped between the last quarter of 2012 and the first quarter of this year, while volumes in the UK regions picked up as investors found it harder to ignore the yield gap between prime and secondary locations and properties, according to property services firm GVA Grimley.
So, where are firms looking? It would make sense to invest in areas with manufacturing, but what does the UK produce? Back in Argentina, I was stuck for an instant answer, apart from mentioning vacuum cleaner maker Dyson, because it is hard to think on the spot of many British manufacturing success stories. Perhaps this is rooted in fact.
Independent economic consultant Christopher Smallwood, who is a former chief economist at oil group BP, recently carried out a systematic review of growth, productivity, earnings, employment and trade performance of companies in the UK. “Britain’s traditional manufacturing-based exports simply are failing to make headway,” he said. “The UK’s future prosperity will depend largely on the success of the UK’s ‘service exporters’, principally financial services.”
That said, manufacturing is still important to the UK economy, and that is borne out by the UK Parliament, which produced a 2012 report on corporate contribution to the UK economy. It found that manufacturing provides 10.8 percent of the UK’s total “gross value added,” which measures the contribution that various sectors of the economy make.
In a recent PERE roundtable discussion on the UK market, Cameron Spry, head of investments at Tristan Capital Partners, noted that manufacturing productivity actually had increased in the last few years, with car manufacturing levels never higher in the UK. Therefore, one of the areas his firm is interested in is the logistics market around the country.
Of course, such firms are broadly excited by the less location-specific opportunity that exists in recapitalizing real estate owned by motivated sellers. Nevertheless, like this report, firms are seeing compelling opportunities in the four main property types outside of London without having to take construction and development risk, particularly Class A space in areas where supply is constrained.
Rockspring Property Investment Managers provides another example of a firm investing outside London. It currently is focused on speculative development in the south east of England for a core-plus fund. It sees more chance of economic growth in certain towns such as Staines, where there is a shortage of Class A offices. Against weak competition, it has found itself the biggest developer of offices within the M25 motorway that encircles London. “We see increasing opportunities in the provinces for yield,” said Neal Shegog, a partner and fund director at the firm.
Further north, Aberdeen in Scotland is catching the eye as the center of the global oil services industry. M3 Capital Partners, yet another London-based firm, has entered into a pre-let development transaction with a major oil-related company in that city. Meanwhile, Cambridge in England is yet another location of interest, given the research and technology nature of the companies present in the city’s science parks and laboratories.
Even in secondary cities where there is not much growth, some opportunities are being found. In December, Tristan bought The Cube in Birmingham, Britain’s second largest city, from Lone Star Funds, which owned the mixed-use property as part of the Project Royal portfolio of nonperforming loans it acquired from Lloyds Banking Group. Tristan purchased the 215,000-square-foot asset for its opportunity fund at a yield of 8.42 percent, or nearly half of the original construction cost, and it has taken the risk of leasing up the vacant elements.
Spry said third-tier locations are getting crushed by second-tier locations – in this case, Birmingham. Manchester is another example, with both cities seemingly benefitting from austerity and efficiency drives by some public or quasi-public bodies.
Experts point out that examples such as Aberdeen and Cambridge are few and far between, as there simply are not that many instances of prosperity outside of London. So, although fund managers are looking at locations outside the capital for yield, the bulk of the deals for opportunistic funds appear likely to come from distressed situations and assets in need of fresh capital.