UK Real Estate Update
ADVISORY
UK Real Estate Update Autumn 2011 www.kpmg.co.uk/realestate
1 | UK Real Estate Spotlight
UK RE Spotlight – The two speed property market
Q1‘11 Q1‘11
Q2‘11 Q2‘11 Brussels Brussels 0.60.6
United Kingdom United Kingdom
Warsaw Warsaw 0.70.7
Q4‘10 Q4‘10
Q3‘10 Q3‘10
Q2‘10 Q2‘10
Q1‘10 Q1‘10
Q4‘09 Q4‘09
Q3‘09 Q3‘09
Q2‘09 Q2‘09
Q1‘09 Q1‘09
Q4‘08 Q4‘08
Q3‘08 Q3‘08
Q2‘08 Q2‘08
London London
Oslo Oslo 0.70.7
Amsterdam/Randstad Amsterdam/Randstad 0.90.9
Munich Munich 1.01.0
Milan Milan 1.01.0
Moscow Moscow 1.21.2
Frankfurt/Rhine-Main Frankfurt/Rhine-Main 1.61.6
Stockholm Stockholm 2.02.0
Manchester Manchester Metro Metro 2.22.2
Hamburg Hamburg 2.32.3
Rhine-Ruhr Rhine-Ruhr 2.62.6
Berlin-Brandenburg Berlin-Brandenburg 2.82.8
Transaction volumes - major EU cities Transaction - major EU cities Source: Real volumes Capital Analytics Source: Real Capital Analytics
Paris Paris 4.74.7
€10.0 €10.0 €9.0 €9.0 €8.0 €8.0 €7.0 €7.0 €6.0 €6.0 €5.0 €5.0 €4.0 €4.0 €3.0 €3.0 €2.0 €2.0 €1.0 €1.0 €0.0 €0.0
Q1‘08 Q1‘08
8.00% 8.00% 7.50% 7.50% 7.00% 7.00% 6.50% 6.50% 6.00% 6.00% 5.50% 5.50% 5.00% 5.00% 4.50%
4.50% 4.00%
4.00%
UK property yields - London versus the UK UK property yields -Analytics London versus the UK Source: Real Capital Source: Real Capital Analytics
London London Metro Metro 8.78.7
Overseas investors, in particular, have been attracted by the weakness of Sterling and the familiarity of the London market. The UK is increasingly being seen as a safe haven, spurred on by the European sovereign debt crisis. As such, investors with EU allocations have remained focussed on the UK and Northern European markets. This was also borne out in the cross border capital flows – around 47% of investment in London property was by foreign investors (vs. a 20% average for the rest of the UK). Of the total foreign capital targeting the UK this year, 84% was invested in the London market, vs. a longer term average of 68% since 2007.
€ bn € bn
The aggregate UK data masks the ongoing split in all sectors within the UK market between London (and a few other prime spots) and the rest of the UK. London remained the most
attractive investment destination in
Europe, attracting €8.7ml of investment in the last 12 months; almost double that of the next highest city (Paris).
Denominated in £in(mil) Denominated £ (mil)
The fourTh quarTer of 2010
saw the biggest property transaction volumes since the peak of the market. Since then the market has been somewhat more subdued; with significant declines in Q2 2011, the trend is certainly for a flattening out of the UK market.
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
UK Real Estate Spotlight | 2
The UK REITs, having built up considerable ‘war chests’ over the previous 18 months, have also been extremely active in the UK markets again in the last two quarters, with significant net investment in UK property.
Cross-Border Cross-Border Source: Real Capital Source: Analytics Real Capital Analytics Public Listed/REITs
0
0
0
0 -2000 -5000 -4000 -6000 -10000
-8000 -15000 2008 -10000
0
2009 2008 Acq
2008
Disp
2009 2010 2009
Acq Net
Disp
Acq
2011 2010 (YTD) 2010 Net
Disp
Net
2011 (YTD) 2011
Acq
Disp
2009 2010 2009 Acq Net Acq
Disp
nce 4%
4%
-8000 -10000 -10000 -15000
-4000 -6000 -8000 -10000 2009 2008 2009
2008 2008
Acq
Denominated in £ (mil) Denominated in £ (mil)
12000 4000 10000 8000 2000 6000 4000 0 2000 0 -2000 -2000 -4000 -4000 -6000 -6000 -8000 -10000
Disp Disp
Acq Net Net
2011 2010 2011 (YTD) (YTD) Net Disp
20 (YT
2011 2010 2010 (YTD) Disp
Net
Net
2011 2011 (YTD) (YTD)
4000 2000 0 -2000 -4000 -6000 2009 2010
2009 2008
2008
2009
2008
Acq
Acq
Disp Disp
2010
Acq Net
Net
2011 2010 (YTD) 2011 Disp Net (YTD)
Foreign investment Foreign sources, investment UK - since sources, 2007 UK - since 2007 Source: Real Capital Source: Analytics Real Foreign investment sources, UK - Capital year toAnalytics date Source: Real Capital Analytics Other 26%
Other 19% Other 26% Other 19%
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member France 4% firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Spain 3% Singapore 4%
2009 2010 2010
Private Private Source: Real Capital Analytics Source: Real Capital Analytics Institutional Source: Real Capital Analytics 6000 6000
gn investment Foreign sources, investment UK - year sources, to dateUK - year to date Foreign sources, UK - since 2007 ce: Real Capital Source: Analytics Realinvestment Capital Analytics Source: Real Capital Analytics Other 19%
-6000 -5000
-2000
Acq
Denominated £ (mil) Denominated in in £ (mil)
2009 2008 2008
-4000 0
(YTD)
Institutional Institutional Private Source: Real Capital Analytics Source: Real Capital Analytics Source: Real Capital Analytics 12000 6000 10000 8000 4000 6000 4000 2000 2000 00 -2000 -4000 -2000 -6000 -4000 -8000 -10000 -6000 2008
5000 -2000
Denominated in £ (mil)
0
Denominated in £ (mil)
Denominated £ (mil) Denominated in £ in (mil)
0
15000 Source: Real Capital Analytics 4000 10000 2000 5000 0
Denominated in £ (mil) Denominated in £ (mil)
0
Public Listed/REITs Public Listed/REITs Cross-Border Source: Real Capital Source: Analytics Real Capital Analytics Source: Real Capital Analytics 4000 4000 15000 2000 2000 10000 0 0
Spain 3% France 4%
Spain 3%
Other 26%
20 (Y
3 | UK Real Estate Spotlight
The deleveraging of The uK
property market continues to be a strong influence. In 2010 the UK average LTV ratios declined by 4% to 63%, a trend which has continued into 2011. Nonetheless, the evidence over the last 6 months shows that certain banks (in particular the German banks) are keen to lend into the UK property market, albeit on a selective basis. With the UK banks remaining overexposed to UK and Irish property and Basel III forcing a cautious approach by all EU lenders, we expect the trend in conservative lending to continue. Many creative solutions to both property financing and the search for suitable investment opportunities are emerging. As returns and supply have fallen, equity investors are also showing an increasing appetite to enter the real estate debt markets, particularly in partnership with traditional lenders. However, whilst new sources of debt financing are emerging, many of the assets requiring refinancing
in coming years are likely to be of lower quality and may not match investor requirements. Therefore, we expect that as the UK banks reduce their real estate exposure, this will put further pressure on the yield gap between primary and secondary assets. Persistent inflation risks and extremely low risk-free yields are likely to stimulate continued demand for investment properties. The weight of equity investors has kept the pressure on UK property yields. However, a lack of investment opportunities in the core market is driving investors to seek alternative property investments. For example, interest in student accommodation, residential property and property development joint ventures (such as the Canary Wharf Group and Qatari Diar’s partnership to develop the Shell Centre) is on the rise as investors strive to achieve target returns. Certainly, we are witnessing a marked shift up the risk curve and investors will
Foreign investment sources, UK - yearsources, to date UK - year to date Foreign investment Source: Real Capital Analytics Source: Real Capital Analytics Other 19%
France 4%
Singapore 4% Islands 5%
Other 26%
Other 19%
France 4%
Spain 3%
Singapore 4%
United States 32%
United States 32%
Australia 4% Qatar 4%
Hong Kong 6%
UAE 6%
Japan 6%
Switzerland 6%
Spain 3%
UAE 6% Netherlands 4%
Canada 5%
Total £6,889.4m
Qatar 32% Canada 7% Total £6,889.4m
Qatar 32%
United States 31%
Qatar 4%
Japan 6% Switzerland 6% Canada 7%
Other 26%
Australia 4%
Netherlands 4%
Japan 6%
Japan 6%
The significant overseas capital inflows also leave the UK property market exposed to currency risk, particularly in relation to the European sovereign debt crisis. Any relative strengthening of Sterling could reduce the relative attractiveness of the UK or prompt foreign investors to realise investments. A devaluation of the Euro may price EU investors out of the UK markets, especially in relation to German cities.
Foreign investment sources, UK - since 2007 UK - since 2007 Foreign investment sources, Source: Real Capital Analytics Source: Real Capital Analytics
Channel Islands 5%
g Kong 6%
need to ensure they are comfortable with the additional risks they are taking. Significant uncertainty remains and the effects of the government’s austerity measures are yet to be felt. Many occupiers, particularly in the retail sector, are struggling for survival. A recession, possibly caused by the European sovereign debt crisis or effects of the public spending cuts could trigger a wave of bankruptcies. This risk is highest in the regions, with the retail sector likely to be the first to experience any pain.
Germany 8%
Canada 5% Germany 8% Ireland 11% Total: £65,309.8m
Ireland 11% Total: £65,309.8m
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
United Sta
UK Real Estate Spotlight | 4
“Certainly, we are witnessing a marked shift up the risk curve as investors strive to achieve target returns” © 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
5 | UK Real Estate Spotlight
Office property market
Prime office renTal growTh
Source: CBRE
20.0%
€ sq.m/yr
1200.0
15.0%
1000.0 800.0
10.0%
600.0
5.0%
400.0 0.0%
Prime rent
Compound (p.a) % Growth 5 yr
-5.0%
Glasgow
Edinburgh
Cardiff
Reading
Newcastle
Leeds
Bristol
Birmingham
Manchester
London (City)
0.0
London (West End)
200.0
Compound (p.a) % Growth 1 yr
7000.0
160
6000.0
140 120
5000.0
100
4000.0
80
3000.0
60 20
Quaterly Vol.
Office yields London M25/South East Provincial
Q2‘11
Q1‘11
Q4‘10
Q3‘10
Q2‘10
Q1‘10
Q4‘09
0 Q3‘09
Q4‘08
Q3‘08
Q2‘08
0.0
Q2‘09
40
1000.0 Q1‘09
2000.0
No. of properties
UK commercial property activity Source: Real Capital Analytics
Q1‘08
Investor demand for the best stock has remained strong, particularly in the South East. London City prime yields have stabilised at around 5%, with prime office yields in the West End of around 4%. Elsewhere in the UK, yields have generally remained flat, with moderate gains and falls in various regions. Limited supply of prime product is stimulating interest in secondary and short term income property opportunities, a trend that looks set to accelerate in H2 2011.
1400.0
Volume £ (mil)
has outperformed the wider property market in 2011, primarily driven by the West End and Central London. Prime office rents have grown by 4% in the past year, the West End leading the way with growth of 8.3%. In London, the growth in prime rents is being driven by a lack of supply of new stock coming to the market as a result of the slowdown in speculative development in 2009/2010. This is likely to change – over 4.5 million sq ft of office space is currently under construction in central London and due to complete over the next few years. Due to the large number of lease expiries over the next few years, the outlook for London prime rents is for modest growth, with rents for anything other than the best locations outside of London likely to come under pressure. There is also evidence of increasing incentives being offered, with the average rent free period now over 18 months.
Prime Office Rents - June 2011 Source: Real Capital Analytics
No. of properties
Dec-10
May-11
West End City Prime Good secondary Secondary Prime Good secondary Secondary
4.00% 5.35% 6.25% 7.75% 10.50% 6.00% 7.75% 10.50%
4.00% 5.25% 6.25% 7.75% 10.50% 6.00% 7.75% 10.50%
Jun-11 4.00% 5.25% 6.25% 7.75% 10.50% 6.00% 7.75% 10.50%
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
UK Real Estate Spotlight | 6
Retail property market
desPiTe The numerous issues
Source: CBRE
€ sq.m/yr
6000 5000 4000 3000 2000
Prime rent
Compound (p.a) % Growth 5 yr
Glasgow
Edinburgh
Cardiff
Leeds
Birmingham
Manchester
London (West End)
0
London (City)
1000
Compound (p.a) % Growth 1 yr
UK retail property activity Source: Real Capital Analytics
450 350 250 150
No. of properties
550
5000.0 4500.0 4000.0 3500.0 3000.0 2500.0 2000.0 1500.0 1000.0 500.0 0.0
Quaterly Vol.
Office yields High street retail
Shopping centres Retail warehouses
Supermarkets
-50 Q2‘11
Q1‘11
Q4‘10
Q3‘10
Q2‘10
Q1‘10
Q4‘09
Q3‘09
Q2‘09
Q1‘09
Q4‘08
Q3‘08
50 Q2‘08
Shopping centre and retail warehousing yields have been stable. REITs and opportunity funds have dominated interest in this area. Yields for prime shopping centres remain at 5.5%. Yields for secondary shopping centres in contrast are around 7% - 10%. Outlook in the retail warehouse subsector has been cautious with subdued sales. Retail warehouse park yields have been stable at 5.25%, and solus units yielding around 6%.
7000
Q1‘08
Investment demand is heavily skewed towards the prime end of the market, with demand for Central London properties in prime locations at an all time high. Therefore, whilst prime yields in London have compressed in the past 12 months to between 3% and 4.75%, the yield gap between prime and secondary properties has widened. We expect yields for prime assets to remain stable, however, the secondary markets will remain under pressure.
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0%
8000
Volume £ (mil)
facing the retail sector, including limited real wage growth, persistent inflationary pressure, numerous profit warnings, store closures and administration proceedings, rents have been broadly flat in the year to June 2011 and fell only marginally in Q2 2011, by 0.2%. However, this masks a significant polarisation of the market. London continues to experience strong demand from international retailers and established UK names. Central London recorded rental growth of 0.7% in Q2 2011, versus rental falls across almost all the regions. Shopping centres have been the worst performing sector, with rental falls of 4% over the past year.
Prime Retail Rents (High Street Shops) - June 2011 Source: Real Capital Analytics
No. of properties
May-11
Prime Good secondary Secondary Prime Best secondary
Dec-10 4.75% 6.00% 8.75% 5.50% 6.25%
4.75% 6.00% 8.75% 5.50% 6.25%
Jun-11 4.75% 6.00% 8.75% 5.50% 6.25%
Secondary Park - Prime (Open User A1) Park - Prime (Bulky User) Solus - Prime (Bulky User) Park - Secondary
7.50% 5.25% 6.00% 6.50% 8.50%
7.50% 5.00% 5.75% 6.50% 8.50%
8.00% 5.00% 5.75% 6.00% 8.25%
4.75%
4.75%
4.75%
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
7 | UK Real Estate Spotlight
Industrial
indusTrial ProPerTy has generally
the secondary markets has been weak; supply, frequently in portfolios released by banks, has been limited due to it not meeting investor requirements. As such, whilst yields for prime London stock have been stable at 6% to 6.25%, overall yields in the UK overall have settled at around 7.4%.
been the weakest performer over the year to date. Income returns (rents) have remained broadly flat. Demand for space has been relatively robust, however, there is a widely perceived mismatch between occupier requirements and the type of stock available. Supply of new stock is limited, with developers postponing development projects due to economic concerns and limited development financing.
Due to the weak economic growth expectations, little movement in rents or investment activity is expected in 2011, with the exception of certain prime locations, such as London, where the limited supply of quality assets may put pressure on rents and yields.
Investment activity has declined steadily over Q1 and Q2 2011. Whilst demand for investment grade stock has remained strong, investment activity in
1600.0
160
1400.0
140
1200.0
120
1000.0
100
800.0
80
600.0
60
400.0
40
200.0
20
No. of properties
Volume £ (mil)
UK Industrial property market activity Source: Real Capital Analytics
0
Quaterly Vol.
Q2‘11
Q1‘11
Q4‘10
Q3‘10
Q2‘10
Q1‘10
Q4‘09
Q3‘09
Q2‘09
Q1‘09
Q4‘08
Q3‘08
Q2‘08
Q1‘08
0.0
No. of properties
Office yields Prime Estate (Greater London, excluding Heathrow) Prime Estate (excluding Greater London) Good secondary estate Secondary estate
Dec-10 6.50% 7.25% 8.25% 11.00%
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
May-11 6.25% 7.00% 8.25% 11.00%
Jun-11 6.25% 7.00% 8.25% 11.00%
UK Real Estate Spotlight | 8
“A recession, possibly caused by the European sovereign debt crisis... could trigger a wave of bankruptcies... with the retail sector likely to be the first to experience any pain.”
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
9 | UK Real Estate Spotlight
Residential property market
The uK housing marKeT
over the UK government spending cuts have undermined household spending power and confidence. To date, low interest rates have resulted in limited distressed sales, although the Bank of England’s latest report indicates an expectation that payment defaults are expected to rise in coming months.
continues to remain weak, with house prices across the UK having fallen by 1.1% in the past year. This is being driven by ongoing concerns over the UK economy and the limited availability of mortgage finance. There have been limited positive signs for the housing market in recent months – the manufacturing and services sectors have shown growth and overall around 300,000 jobs have been created in the UK economy in the first half of 2011. Against this, high inflation and no real wage growth coupled with anxieties
London’s residential property market has significantly outperformed the UK market, with price increases of 5% over the last year. This is being driven by London’s position as a leading global financial centre and the weakness of Sterling, which has attracted significant
foreign investment, particularly in prime central locations. In addition, the difficulties for first time buyers have resulted in rental price growth and consequently growth of the private rented sector. As already mentioned, we are seeing increased interest from institutional and other large scale investors in residential property, a trend which we expect to continue in coming months. We expect the broader UK housing market to remain flat for the rest of the year, with continued but subdued growth in London.
Average UK house prices by region Source: Department for Communities and Local Government 425000
375000
£
325000
275000
225000
175000
125000
Q1
Q2
Q3
Q4
Q1
2007
Q2
Q3
Q4
2008
United Kingdom North East North West Yorkshire and the Humber
East Midlands West Midlands East London
Q1
Q2
Q3
Q4
2009 South East South West Wales Scotland
Q1
Q2
Q3
Q4
2010
Q1 2011
Northern Ireland
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
UK Real Estate Spotlight | 10
“London’s residential property market has significantly outperformed the UK market”
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Contact us Richard White Partner,
Head of Real Estate
T: +44 20 73114010 E: [email protected] Andy Pyle Partner, Real Estate T: +44 20 7311 6499 E: [email protected] John Taylor Associate Partner, Real Estate T: +44 20 7311 1672 E: [email protected]
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
www.kpmg.co.uk/realestate
RR Donnelley l RRD-260642 l October 2011 l Printed on recycled material.
UK Real Estate Update Autumn 2011 www.kpmg.co.uk/realestate
1 | UK Real Estate Spotlight
UK RE Spotlight – The two speed property market
Q1‘11 Q1‘11
Q2‘11 Q2‘11 Brussels Brussels 0.60.6
United Kingdom United Kingdom
Warsaw Warsaw 0.70.7
Q4‘10 Q4‘10
Q3‘10 Q3‘10
Q2‘10 Q2‘10
Q1‘10 Q1‘10
Q4‘09 Q4‘09
Q3‘09 Q3‘09
Q2‘09 Q2‘09
Q1‘09 Q1‘09
Q4‘08 Q4‘08
Q3‘08 Q3‘08
Q2‘08 Q2‘08
London London
Oslo Oslo 0.70.7
Amsterdam/Randstad Amsterdam/Randstad 0.90.9
Munich Munich 1.01.0
Milan Milan 1.01.0
Moscow Moscow 1.21.2
Frankfurt/Rhine-Main Frankfurt/Rhine-Main 1.61.6
Stockholm Stockholm 2.02.0
Manchester Manchester Metro Metro 2.22.2
Hamburg Hamburg 2.32.3
Rhine-Ruhr Rhine-Ruhr 2.62.6
Berlin-Brandenburg Berlin-Brandenburg 2.82.8
Transaction volumes - major EU cities Transaction - major EU cities Source: Real volumes Capital Analytics Source: Real Capital Analytics
Paris Paris 4.74.7
€10.0 €10.0 €9.0 €9.0 €8.0 €8.0 €7.0 €7.0 €6.0 €6.0 €5.0 €5.0 €4.0 €4.0 €3.0 €3.0 €2.0 €2.0 €1.0 €1.0 €0.0 €0.0
Q1‘08 Q1‘08
8.00% 8.00% 7.50% 7.50% 7.00% 7.00% 6.50% 6.50% 6.00% 6.00% 5.50% 5.50% 5.00% 5.00% 4.50%
4.50% 4.00%
4.00%
UK property yields - London versus the UK UK property yields -Analytics London versus the UK Source: Real Capital Source: Real Capital Analytics
London London Metro Metro 8.78.7
Overseas investors, in particular, have been attracted by the weakness of Sterling and the familiarity of the London market. The UK is increasingly being seen as a safe haven, spurred on by the European sovereign debt crisis. As such, investors with EU allocations have remained focussed on the UK and Northern European markets. This was also borne out in the cross border capital flows – around 47% of investment in London property was by foreign investors (vs. a 20% average for the rest of the UK). Of the total foreign capital targeting the UK this year, 84% was invested in the London market, vs. a longer term average of 68% since 2007.
€ bn € bn
The aggregate UK data masks the ongoing split in all sectors within the UK market between London (and a few other prime spots) and the rest of the UK. London remained the most
attractive investment destination in
Europe, attracting €8.7ml of investment in the last 12 months; almost double that of the next highest city (Paris).
Denominated in £in(mil) Denominated £ (mil)
The fourTh quarTer of 2010
saw the biggest property transaction volumes since the peak of the market. Since then the market has been somewhat more subdued; with significant declines in Q2 2011, the trend is certainly for a flattening out of the UK market.
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
UK Real Estate Spotlight | 2
The UK REITs, having built up considerable ‘war chests’ over the previous 18 months, have also been extremely active in the UK markets again in the last two quarters, with significant net investment in UK property.
Cross-Border Cross-Border Source: Real Capital Source: Analytics Real Capital Analytics Public Listed/REITs
0
0
0
0 -2000 -5000 -4000 -6000 -10000
-8000 -15000 2008 -10000
0
2009 2008 Acq
2008
Disp
2009 2010 2009
Acq Net
Disp
Acq
2011 2010 (YTD) 2010 Net
Disp
Net
2011 (YTD) 2011
Acq
Disp
2009 2010 2009 Acq Net Acq
Disp
nce 4%
4%
-8000 -10000 -10000 -15000
-4000 -6000 -8000 -10000 2009 2008 2009
2008 2008
Acq
Denominated in £ (mil) Denominated in £ (mil)
12000 4000 10000 8000 2000 6000 4000 0 2000 0 -2000 -2000 -4000 -4000 -6000 -6000 -8000 -10000
Disp Disp
Acq Net Net
2011 2010 2011 (YTD) (YTD) Net Disp
20 (YT
2011 2010 2010 (YTD) Disp
Net
Net
2011 2011 (YTD) (YTD)
4000 2000 0 -2000 -4000 -6000 2009 2010
2009 2008
2008
2009
2008
Acq
Acq
Disp Disp
2010
Acq Net
Net
2011 2010 (YTD) 2011 Disp Net (YTD)
Foreign investment Foreign sources, investment UK - since sources, 2007 UK - since 2007 Source: Real Capital Source: Analytics Real Foreign investment sources, UK - Capital year toAnalytics date Source: Real Capital Analytics Other 26%
Other 19% Other 26% Other 19%
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member France 4% firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Spain 3% Singapore 4%
2009 2010 2010
Private Private Source: Real Capital Analytics Source: Real Capital Analytics Institutional Source: Real Capital Analytics 6000 6000
gn investment Foreign sources, investment UK - year sources, to dateUK - year to date Foreign sources, UK - since 2007 ce: Real Capital Source: Analytics Realinvestment Capital Analytics Source: Real Capital Analytics Other 19%
-6000 -5000
-2000
Acq
Denominated £ (mil) Denominated in in £ (mil)
2009 2008 2008
-4000 0
(YTD)
Institutional Institutional Private Source: Real Capital Analytics Source: Real Capital Analytics Source: Real Capital Analytics 12000 6000 10000 8000 4000 6000 4000 2000 2000 00 -2000 -4000 -2000 -6000 -4000 -8000 -10000 -6000 2008
5000 -2000
Denominated in £ (mil)
0
Denominated in £ (mil)
Denominated £ (mil) Denominated in £ in (mil)
0
15000 Source: Real Capital Analytics 4000 10000 2000 5000 0
Denominated in £ (mil) Denominated in £ (mil)
0
Public Listed/REITs Public Listed/REITs Cross-Border Source: Real Capital Source: Analytics Real Capital Analytics Source: Real Capital Analytics 4000 4000 15000 2000 2000 10000 0 0
Spain 3% France 4%
Spain 3%
Other 26%
20 (Y
3 | UK Real Estate Spotlight
The deleveraging of The uK
property market continues to be a strong influence. In 2010 the UK average LTV ratios declined by 4% to 63%, a trend which has continued into 2011. Nonetheless, the evidence over the last 6 months shows that certain banks (in particular the German banks) are keen to lend into the UK property market, albeit on a selective basis. With the UK banks remaining overexposed to UK and Irish property and Basel III forcing a cautious approach by all EU lenders, we expect the trend in conservative lending to continue. Many creative solutions to both property financing and the search for suitable investment opportunities are emerging. As returns and supply have fallen, equity investors are also showing an increasing appetite to enter the real estate debt markets, particularly in partnership with traditional lenders. However, whilst new sources of debt financing are emerging, many of the assets requiring refinancing
in coming years are likely to be of lower quality and may not match investor requirements. Therefore, we expect that as the UK banks reduce their real estate exposure, this will put further pressure on the yield gap between primary and secondary assets. Persistent inflation risks and extremely low risk-free yields are likely to stimulate continued demand for investment properties. The weight of equity investors has kept the pressure on UK property yields. However, a lack of investment opportunities in the core market is driving investors to seek alternative property investments. For example, interest in student accommodation, residential property and property development joint ventures (such as the Canary Wharf Group and Qatari Diar’s partnership to develop the Shell Centre) is on the rise as investors strive to achieve target returns. Certainly, we are witnessing a marked shift up the risk curve and investors will
Foreign investment sources, UK - yearsources, to date UK - year to date Foreign investment Source: Real Capital Analytics Source: Real Capital Analytics Other 19%
France 4%
Singapore 4% Islands 5%
Other 26%
Other 19%
France 4%
Spain 3%
Singapore 4%
United States 32%
United States 32%
Australia 4% Qatar 4%
Hong Kong 6%
UAE 6%
Japan 6%
Switzerland 6%
Spain 3%
UAE 6% Netherlands 4%
Canada 5%
Total £6,889.4m
Qatar 32% Canada 7% Total £6,889.4m
Qatar 32%
United States 31%
Qatar 4%
Japan 6% Switzerland 6% Canada 7%
Other 26%
Australia 4%
Netherlands 4%
Japan 6%
Japan 6%
The significant overseas capital inflows also leave the UK property market exposed to currency risk, particularly in relation to the European sovereign debt crisis. Any relative strengthening of Sterling could reduce the relative attractiveness of the UK or prompt foreign investors to realise investments. A devaluation of the Euro may price EU investors out of the UK markets, especially in relation to German cities.
Foreign investment sources, UK - since 2007 UK - since 2007 Foreign investment sources, Source: Real Capital Analytics Source: Real Capital Analytics
Channel Islands 5%
g Kong 6%
need to ensure they are comfortable with the additional risks they are taking. Significant uncertainty remains and the effects of the government’s austerity measures are yet to be felt. Many occupiers, particularly in the retail sector, are struggling for survival. A recession, possibly caused by the European sovereign debt crisis or effects of the public spending cuts could trigger a wave of bankruptcies. This risk is highest in the regions, with the retail sector likely to be the first to experience any pain.
Germany 8%
Canada 5% Germany 8% Ireland 11% Total: £65,309.8m
Ireland 11% Total: £65,309.8m
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United Sta
UK Real Estate Spotlight | 4
“Certainly, we are witnessing a marked shift up the risk curve as investors strive to achieve target returns” © 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
5 | UK Real Estate Spotlight
Office property market
Prime office renTal growTh
Source: CBRE
20.0%
€ sq.m/yr
1200.0
15.0%
1000.0 800.0
10.0%
600.0
5.0%
400.0 0.0%
Prime rent
Compound (p.a) % Growth 5 yr
-5.0%
Glasgow
Edinburgh
Cardiff
Reading
Newcastle
Leeds
Bristol
Birmingham
Manchester
London (City)
0.0
London (West End)
200.0
Compound (p.a) % Growth 1 yr
7000.0
160
6000.0
140 120
5000.0
100
4000.0
80
3000.0
60 20
Quaterly Vol.
Office yields London M25/South East Provincial
Q2‘11
Q1‘11
Q4‘10
Q3‘10
Q2‘10
Q1‘10
Q4‘09
0 Q3‘09
Q4‘08
Q3‘08
Q2‘08
0.0
Q2‘09
40
1000.0 Q1‘09
2000.0
No. of properties
UK commercial property activity Source: Real Capital Analytics
Q1‘08
Investor demand for the best stock has remained strong, particularly in the South East. London City prime yields have stabilised at around 5%, with prime office yields in the West End of around 4%. Elsewhere in the UK, yields have generally remained flat, with moderate gains and falls in various regions. Limited supply of prime product is stimulating interest in secondary and short term income property opportunities, a trend that looks set to accelerate in H2 2011.
1400.0
Volume £ (mil)
has outperformed the wider property market in 2011, primarily driven by the West End and Central London. Prime office rents have grown by 4% in the past year, the West End leading the way with growth of 8.3%. In London, the growth in prime rents is being driven by a lack of supply of new stock coming to the market as a result of the slowdown in speculative development in 2009/2010. This is likely to change – over 4.5 million sq ft of office space is currently under construction in central London and due to complete over the next few years. Due to the large number of lease expiries over the next few years, the outlook for London prime rents is for modest growth, with rents for anything other than the best locations outside of London likely to come under pressure. There is also evidence of increasing incentives being offered, with the average rent free period now over 18 months.
Prime Office Rents - June 2011 Source: Real Capital Analytics
No. of properties
Dec-10
May-11
West End City Prime Good secondary Secondary Prime Good secondary Secondary
4.00% 5.35% 6.25% 7.75% 10.50% 6.00% 7.75% 10.50%
4.00% 5.25% 6.25% 7.75% 10.50% 6.00% 7.75% 10.50%
Jun-11 4.00% 5.25% 6.25% 7.75% 10.50% 6.00% 7.75% 10.50%
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UK Real Estate Spotlight | 6
Retail property market
desPiTe The numerous issues
Source: CBRE
€ sq.m/yr
6000 5000 4000 3000 2000
Prime rent
Compound (p.a) % Growth 5 yr
Glasgow
Edinburgh
Cardiff
Leeds
Birmingham
Manchester
London (West End)
0
London (City)
1000
Compound (p.a) % Growth 1 yr
UK retail property activity Source: Real Capital Analytics
450 350 250 150
No. of properties
550
5000.0 4500.0 4000.0 3500.0 3000.0 2500.0 2000.0 1500.0 1000.0 500.0 0.0
Quaterly Vol.
Office yields High street retail
Shopping centres Retail warehouses
Supermarkets
-50 Q2‘11
Q1‘11
Q4‘10
Q3‘10
Q2‘10
Q1‘10
Q4‘09
Q3‘09
Q2‘09
Q1‘09
Q4‘08
Q3‘08
50 Q2‘08
Shopping centre and retail warehousing yields have been stable. REITs and opportunity funds have dominated interest in this area. Yields for prime shopping centres remain at 5.5%. Yields for secondary shopping centres in contrast are around 7% - 10%. Outlook in the retail warehouse subsector has been cautious with subdued sales. Retail warehouse park yields have been stable at 5.25%, and solus units yielding around 6%.
7000
Q1‘08
Investment demand is heavily skewed towards the prime end of the market, with demand for Central London properties in prime locations at an all time high. Therefore, whilst prime yields in London have compressed in the past 12 months to between 3% and 4.75%, the yield gap between prime and secondary properties has widened. We expect yields for prime assets to remain stable, however, the secondary markets will remain under pressure.
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0%
8000
Volume £ (mil)
facing the retail sector, including limited real wage growth, persistent inflationary pressure, numerous profit warnings, store closures and administration proceedings, rents have been broadly flat in the year to June 2011 and fell only marginally in Q2 2011, by 0.2%. However, this masks a significant polarisation of the market. London continues to experience strong demand from international retailers and established UK names. Central London recorded rental growth of 0.7% in Q2 2011, versus rental falls across almost all the regions. Shopping centres have been the worst performing sector, with rental falls of 4% over the past year.
Prime Retail Rents (High Street Shops) - June 2011 Source: Real Capital Analytics
No. of properties
May-11
Prime Good secondary Secondary Prime Best secondary
Dec-10 4.75% 6.00% 8.75% 5.50% 6.25%
4.75% 6.00% 8.75% 5.50% 6.25%
Jun-11 4.75% 6.00% 8.75% 5.50% 6.25%
Secondary Park - Prime (Open User A1) Park - Prime (Bulky User) Solus - Prime (Bulky User) Park - Secondary
7.50% 5.25% 6.00% 6.50% 8.50%
7.50% 5.00% 5.75% 6.50% 8.50%
8.00% 5.00% 5.75% 6.00% 8.25%
4.75%
4.75%
4.75%
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7 | UK Real Estate Spotlight
Industrial
indusTrial ProPerTy has generally
the secondary markets has been weak; supply, frequently in portfolios released by banks, has been limited due to it not meeting investor requirements. As such, whilst yields for prime London stock have been stable at 6% to 6.25%, overall yields in the UK overall have settled at around 7.4%.
been the weakest performer over the year to date. Income returns (rents) have remained broadly flat. Demand for space has been relatively robust, however, there is a widely perceived mismatch between occupier requirements and the type of stock available. Supply of new stock is limited, with developers postponing development projects due to economic concerns and limited development financing.
Due to the weak economic growth expectations, little movement in rents or investment activity is expected in 2011, with the exception of certain prime locations, such as London, where the limited supply of quality assets may put pressure on rents and yields.
Investment activity has declined steadily over Q1 and Q2 2011. Whilst demand for investment grade stock has remained strong, investment activity in
1600.0
160
1400.0
140
1200.0
120
1000.0
100
800.0
80
600.0
60
400.0
40
200.0
20
No. of properties
Volume £ (mil)
UK Industrial property market activity Source: Real Capital Analytics
0
Quaterly Vol.
Q2‘11
Q1‘11
Q4‘10
Q3‘10
Q2‘10
Q1‘10
Q4‘09
Q3‘09
Q2‘09
Q1‘09
Q4‘08
Q3‘08
Q2‘08
Q1‘08
0.0
No. of properties
Office yields Prime Estate (Greater London, excluding Heathrow) Prime Estate (excluding Greater London) Good secondary estate Secondary estate
Dec-10 6.50% 7.25% 8.25% 11.00%
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May-11 6.25% 7.00% 8.25% 11.00%
Jun-11 6.25% 7.00% 8.25% 11.00%
UK Real Estate Spotlight | 8
“A recession, possibly caused by the European sovereign debt crisis... could trigger a wave of bankruptcies... with the retail sector likely to be the first to experience any pain.”
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
9 | UK Real Estate Spotlight
Residential property market
The uK housing marKeT
over the UK government spending cuts have undermined household spending power and confidence. To date, low interest rates have resulted in limited distressed sales, although the Bank of England’s latest report indicates an expectation that payment defaults are expected to rise in coming months.
continues to remain weak, with house prices across the UK having fallen by 1.1% in the past year. This is being driven by ongoing concerns over the UK economy and the limited availability of mortgage finance. There have been limited positive signs for the housing market in recent months – the manufacturing and services sectors have shown growth and overall around 300,000 jobs have been created in the UK economy in the first half of 2011. Against this, high inflation and no real wage growth coupled with anxieties
London’s residential property market has significantly outperformed the UK market, with price increases of 5% over the last year. This is being driven by London’s position as a leading global financial centre and the weakness of Sterling, which has attracted significant
foreign investment, particularly in prime central locations. In addition, the difficulties for first time buyers have resulted in rental price growth and consequently growth of the private rented sector. As already mentioned, we are seeing increased interest from institutional and other large scale investors in residential property, a trend which we expect to continue in coming months. We expect the broader UK housing market to remain flat for the rest of the year, with continued but subdued growth in London.
Average UK house prices by region Source: Department for Communities and Local Government 425000
375000
£
325000
275000
225000
175000
125000
Q1
Q2
Q3
Q4
Q1
2007
Q2
Q3
Q4
2008
United Kingdom North East North West Yorkshire and the Humber
East Midlands West Midlands East London
Q1
Q2
Q3
Q4
2009 South East South West Wales Scotland
Q1
Q2
Q3
Q4
2010
Q1 2011
Northern Ireland
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UK Real Estate Spotlight | 10
“London’s residential property market has significantly outperformed the UK market”
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Contact us Richard White Partner,
Head of Real Estate
T: +44 20 73114010 E: [email protected] Andy Pyle Partner, Real Estate T: +44 20 7311 6499 E: [email protected] John Taylor Associate Partner, Real Estate T: +44 20 7311 1672 E: [email protected]
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
www.kpmg.co.uk/realestate
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