Investor appetite for UK real estate continued unabated in 2005 with a record €71 bln (£48.5 bln) of investment purchases. This represents a further modest rise following the strong growth in 2004 and is a new UK record says global property adviser DTZ.
According to Money into Property, published by DTZ Research, this total was achieved as a result of heavy cross-border investment activity into the UK and a number of large corporate transactions. In 2005, 17.9 bln (£12.2 bln) of purchases emanated from overseas investors. Irish investors continue to be the largest source of capital into the UK with over 3.9 bln (£2.7 bln) of purchases in 2005 representing 22% of total cross-border activity.
Looking forward, DTZ expects a very modest slowdown in investment activity in the UK with total transactions of between £45-50bn in 2006.
Across Europe, the UK remains the dominant real estate investment market, accounting for almost 46% of total aggregate capital flows of 221.6 bln (£152.5 bln) in Europe in 2005. DTZ anticipates that the UK will remain the principal European real estate market for the foreseeable future, particularly with the imminent legislation for a UK-REIT in 2007.
Private capital has driven the UK market in recent years and privately financed investors are expected to remain the key source of equity for the UK over the coming 12 months. Total private debt outstanding to commercial property in the UK is expected to rise by almost 12% to the end of 2006, to stand at 278.1 billion (£191.5 billion).
The real estate market has become truly global which reflects investor recognition of property as a separate asset class. There is a much wider source of capital as well as diverse routes to market including indirect vehicles such as listed securities, non-listed funds, CMBS, derivatives or other synthetic products. DTZ believes 2006 is the year in which these entry routes will become firmly established, serving to meet investor demand for product and offering a truly capital markets approach to the real estate sector.
In the UK, 2005 saw the increasing importance of the real estate derivatives market. If the burgeoning derivatives market proves an attractive new way for banks and other lending organisations to hedge their loan books, the indirect investment market could play a much more important role in years to come rivalling the direct investment market. DTZ estimates approximately £1 billion of derivatives was traded last year with the lower estimates for 2006 being £2 billion following a very bullish first quarter.
Institutional appetite remains strong and DTZ expects insurance companies and pension funds to continue to increase their exposure in 2006. The shift from direct to indirect investment that has characterised recent years will continue to prevail.
HM Government has finally signalled its clear intention to legislate for a UK-REIT in 2007. DTZ remains firmly of the opinion that such a tax efficient and liquid investment vehicle will have a positive impact upon the real estate sector, serving to cement the UK's position as the principal European investment market. A UK-REIT has the potential to expand the UK investment market both in terms of capital and product. The evidence of REIT structures in other real estate markets suggests the market will be characterised by a wave of merger and acquisition activity, with the listed property companies leading the first wave of UK-REIT conversions.
Mike Cutteridge, Head of UK Capital Markets comments: "These are exciting times for the UK real estate investment market. Property has now established itself as a global asset class offering investors a variety of innovative products on a global basis. The forthcoming introduction of a UK-REIT in 2007 will fuel investor interest even further. Whilst UK interest rates have edged up slightly, and scope for further yield compression may be limited, investor demand remains buoyant, reflecting a wide variety of capital sources and the plentiful availability of