London & Capital has announced that it has completed and exchanged on property purchases of US $595 million since July last year. The deals center on German commercial real estate and properties let to UK commercial and public sector tenants, key markets where the Company's fund managers have identified value.
"These markets offer significant but very different opportunities," according to Iain Keys, Director of Real Estate at London & Capital. "Taking the German market first, commercial property yields have started to fall from historically high levels, as the country's economy has embarked on what we believe is a sustained cyclical and structural upswing." Statistical data supporting the case for economic recovery has been evident for many months now, culminating in official figures published last month, showing that the German economy grew by 2.5% in 2006. This represents a substantial acceleration given GDP growth of less than 1.0% in 2005.
One of the most exciting trends is a long-awaited increase in consumer spending, as domestic demand contributed 1.7 percentage points to GDP growth. "Previous economic recoveries in Germany had always foundered on the unwillingness of its citizens to spend, but" says Keys, "it is now increasingly apparent that consumers are getting over this damaging fear."
Against this backdrop, the volume of commercial property transactions in Germany more than doubled in 2006, reaching US $90 billion, with almost 80% of this activity accounted for by foreigners. London & Capital set up its German Real Estate Fund in March last year, and the Fund has participated in gains generated by strong international investment inflows to the German commercial property market in recent months. Gross returns for the Fund were more than 9.6% in the second half of 2006, representing annualised returns in excess of 20%.
Whilst the inflow of money into the German market has resulted in yields falling during the last year, Keys calculates that average yields are still at a highly attractive 6.75% plus. "Given that borrowing can be sourced at below 5%, there is still clear scope for significant yield arbitrage, boding well for continued strong positive returns over the next year."
The Fund has completed the purchase of some ten properties to date, with a further five notarised. The property team at London & Capital, which includes German speaking nationals with direct prior experience of the German market, is currently working on a pipeline of secured contracts for a further tranche of acquisitions, valued at some US $54 million.
Meanwhile, significant activity is also taking place in the company's UK Public Sector Real Estate Fund, which has completed three major purchases during the last seven months, to a value of US $138.5 million. "This market is attractive because of the security of the covenant," says Keys. All the Fund's purchases are leased to British government entities, including central government departments and local authorities, predominantly on long leases.
The British government's excellent creditworthiness marks the Fund out as a particularly attractive vehicle to investors looking for exposure to real estate but with a low level of risk. "In our view, the UK public sector market remains an underexploited investment arena, providing plenty of scope to benefit from a fall in yields. There ought to be a 0.50%-0.75% premium for government occupied property over typical FTSE 250/professional occupiers, but as this is not presently apparent, we are taking full advantage of this." The UK Public Sector Fund currently has a further USD54.4m of properties under offer.
The London & Capital Real Estate team also continues to exploit opportunities in the UK commercial property market, under the auspices of its flagship UK Real Estate Fund. "In particular, we are concentrating on sourcing opportunities which offer the prospect of sustained rental growth, with focal points including central London offices and supermarkets UK-wide," adds Keys.