London's hot property market has commercial-real-estate investors scouring the rest of Britain.
Investors all but ignored cities like Manchester, Edinburgh and Birmingham while the U.K.'s economy faltered in the years after the financial crisis. They preferred the safety of London and its appeal for global buyers. But prices for office buildings and retail space have risen so much in the capital that returns on purchases are anemic.
A London property investor last month bought the
site of Edinburgh's former Royal Infirmary. A complex of offices,
hotels, apartments and shops is in the works.
Murdo MacLeod for The Wall Street Journal.
In the past four months, real-estate investment firm Benson Elliot has spent £100 million on property in Manchester, Cambridge and the northern town of Preston.
The trend in the U.K. mirrors what has happened in the U.S. commercial-real-estate market in the wake of the financial crisis. Investors initially started buying trophy properties in the biggest markets with the most international appeal, like New York and Washington. As prices in those markets increased, demand has shifted to other cities such as Minneapolis and Denver.
London's property market has long benefited from the city's status as a global capital of finance and culture. Prices are stable, there is relatively strong demand from tenants, and foreign buyers like the stability of owning an asset denominated in Britain's currency.
London's appeal as a safe harbor rose during the financial crisis, and prices have continued to climb since then despite new construction. Increasingly, the city's lack of affordable options and low returns are turning investors' focus to areas they had largely ignored.
In 2012, deals outside London accounted for about 40% of all commercial property investment in the U.K. In the first half of this year, that figure edged up to nearly 50%, according to Savills, a real-estate services firm.
The largest deal in Leeds this year was the £29 million sale of the Toronto Square office complex. At the time of the sale in August, it was 20% vacant. With a net initial yield of 7%, "a year ago, this wouldn't have been an attractive proposition," said Clare Bailey, commercial property analyst at Savills.
High demand and low returns in London are "forcing people to see what can be done in the regions," said Edward Trevillion, head of real-estate research at fund manager Scottish Widows Investment Partnership, which manages £146 billion ($235 billion) of assets.
During the financial crisis, investors placed their bets in London, which is less subject to fluctuations in the U.K. economy. Many worried the economic downturn could hurt occupancy levels outside the capital.
Vacancy rates in U.K. offices jumped to 15.8% in 2009, after dropping as low as 7.1% in 2007, according to Savills. They are on the way back: Savills projects the rate to fall to 11.5% next year.
Peripheral cities is offer larger yields to commercial-property investors, who typically raise funds to buy a property and earn a yield on their investment through rents.
In London, rising prices have left yields low. In the city's financial district, the yield on office buildings peaked in January 2009 at 6.75%, not far under the 7% for property outside the capital, according to Savills. As of last month, the London yield had fallen to 4.75%; outside the capital it had only dropped to 5.75%.
Marc Gilbard, chief financial officer at Moorfield, which has £2 billion under management, said that while investors have pushed out to the regions before, this time around has been "particularly acute." That is partly due to foreign buyers seeking to buy real estate in central London as a place to park their money, he said.
There are others signs that money is flowing back outside London. Stephen Rees, head of real-estate advisory at Coutts, the private bank used by Queen Elizabeth, says competition for deals has stiffened.
On a recent commercial deal in Edinburgh, Mr. Rees—who was looking to buy the property on behalf of a wealthy client—said three of the four bidders were institutional investors. "I wasn't expecting that," Mr. Rees said. "That wouldn't have been the case the previous summer."
Investors say they still need to be cautious of occupancy levels, the reliability of tenants and the health of local economies. "You want that rent coming in every month," said Ainslie McLennan, fund manager for Henderson U.K. Property Unit Trust.
Basing an investment decision on U.K. economic-growth figures also needs to be more closely considered, said Marc Mogull, manager partner at Benson Elliot, which has €850 million of equity under management "You're not going to see fundamental growth in the regions like what you'll see in London," he said.
Article Source: http://online.wsj.com/news/articles/SB10001424052702303471004579163561521996776
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