What’s Driving the UK Real Estate Investment Markets?

Investors in the UK are celebrating another strong year for real estate investors, especially in the commercial sector. Capital value has increased by more than 25% in just …

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Investors in the UK are celebrating another strong year for real estate investors, especially in the commercial sector. Capital value has increased by more than 25% in just over two years, and the GDP remains steady, with an expected growth of more 2.5% in the next two years. The resulting strong surge in the property market isn’t limited to London; cities from Brighton to Bristol have reaped the benefits of high demand, and even higher rents. The average rent on a commercial space was up 5.4% last year, and it’s forecast to hit 8% this coming year. As this final quarter draws to a close, the big question on everyone’s mind is "Will this trend continue?" 

Who Are the Players?

In general, the largest gains have been in the industrial and office markets, with retail doing well mainly in areas where there’s a high tourism rate. Demand for industrial spaces will continue to grow, but the big player in that sector looks like it will be tech companies. Although the tech industry itself isn’t expected to hit a big surge, it is still one of the steadiest sectors overall, and the availability of the types of spaces that tech firms love – over-sized, retro, industrial – are expected to revitalize areas of the city that have seen the least benefit from the healthy real property lease market. These are the types of open spaces that don’t really appeal to traditional office space or retail investors.

With demand for commercial spaces expected to remain stable, income is a driving force in the move to real estate, especially among foreign investors. This is a productive cycle that feeds itself. The dual attraction of relatively low interest and high ROI is bringing in interested parties from a number of emerging investment firms, especially retirement fund managers in North America and in the Middle and Far East. In the last fiscal year, foreign investors accounted for more than 50% of all transactions. The lure is the high liquidity rate in the UK commercial real estate markets and overall favourable investment climate.

What Are the Wild Cards?

There are two major issues that could slow down the predicted growth for next year: the state of the markets in China and the specter of a Brexit. The good news is that China seems to be getting a handle on market stabilization, and it’s growing at a more steady, sustainable level after the shocking corrections of the previous few months. With regard to Britain exiting the EU, some investors a little concerned, but there is strong incentive from multiple directions – both inside and outside of the UK – to prevent a withdrawal from the Union. On a positive note, the conditions that usually lead to stagnation or a depression in real property investing – over-borrowing and over-building – are not present in the current economy, nor are they expected to become a factor.

But the big winners are Azmi Mikati and other investment professionals who have a certain finesse when it comes to the art of pinpointing emerging trends in niche real estate markets. The influx of foreign capital and the continuation of a strong local market are creating a perfect storm for the revitalization of London and other urban centres around the globe. As long as the market stability and growth stay the course in the coming months, 2016 will shape up to be another banner year for real estate investors.

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