Despite Q4 of 2022 yielding the worst performance in the property investment market since the covid pandemic began, the outlook for cash-rich individual investors and family offices in the property market is undoubtedly a positive one. With headwinds surrounding interest rates and the threat of recession receding, those sitting on a cash pile have an excellent window of opportunity to secure strong returns from sustainable tenants. Thanks to limited competition from UK institutions and debt-backed property companies, the tide of the market has turned.
Property investment volumes in the UK over the entirety of 2022 totalled a respectable £54.1bn, yet just £7.3bn of property assets changed hands during Q4. This weak Q4 trading reflected cooler investor demand amid rising interest rates, which reduced the attractiveness of property and raised borrowing costs. The political uncertainty following September’s calamitous mini-budget and the consequent threat of a looming recession are sure to have played a key role in this lack of activity too. Whilst this may not be suggestive of a market on the cusp of recovery, there are reasons for cash-buyers to remain optimistic.
So why invest now?
For cash-rich private buyers the opportunities in the UK are numerous. UK institutions reduced their net exposure to UK property for the third consecutive quarter in Q4, offloading more than £470m of property than they bought. With limited – and often non-existent – competition from the institutional market, cash-buyers should seek out such vendors to capitalise on these opportunities. We are already witnessing high-net-worth investors, private property companies and family offices taking advantage of these unstable conditions to acquire previously unobtainable assets. For example, in central Bristol, a family office recently closed on a sale of a £10m+ prime leisure asset at an attractive yield, with additional asset management angles that could be exploited. And there are more great opportunities like these on the market!
Competition is reduced even further when considering debt-backed property companies currently priced out of the market. The cash-buyer does not have redemption or potential liquidity issues, is not beholden to debt or third-party finance, and can make their own mind up as to the state of the economy; as well as an ability to remain unfazed by short-term instability when the medium to longer-term looks healthier. On smaller sales, in the auction markets (which are often a useful barometer as to the state of the property market) cash-buyers have been largely unperturbed by short-term economic problems, as they continue to build their portfolios, albeit generally buying in the sub £1m price bracket. As seen by one of the first commercial auctions of the year, which raised a notable £60m.
Whilst the investment opportunities are numerous, there are particular hotspots that cash-buyers would be wise to consider. Investment in the industrial sector – including both single and multi-let assets – remains popular as the repricing of assets continue. Having had a turbulent last quarter, an element of the office sector remains attractive and opportunity still exists where assets are well-located, high-quality, and have a sub £10m price bracket. Assets should also require limited capital expenditure and have strong ESG credentials to offer investors the best opportunity. Well-let long leased assets with income growth, particularly those with CPI-linked rent reviews (including food stores, leisure and even bars) remain a driver as well. Naturally, cash-buyers will need to assess the location and tenant of these buildings to ensure these are wise investments.
Attractive yields also exist in the retail sector, particularly in instances where tenants have survived the pandemic and are now paying sustainable, rebased levels of rent. The opportunity exists to buy prime assets in locations, such as Bath, and Cheltenham; markets that were previously dominated by the institutional players. These institutional investors are now selling high-street assets in prime locations, resulting in small lot sizes coming onto the market.
While we are not completely out of the woods yet, it appears we have reached the edge of the forest. For the cash-buyer, now is an excellent opportunity to acquire some good quality real estate at historically attractive yields. Inflation looks like it is heading in the right way, the dust around interest rates is settling and the recession is unlikely to be as long or hard as initially predicted. Office workers are also defying the work from home phenomenon and returning to their places of work, boosting local economies along the way.
Opportunities exist across most asset classes. I would advise potential investors, however, to conduct thorough due diligence concentrating on the property fundamentals of location, strength of tenant, sustainable rent levels, limited capital expenditure and higher EPC ratings. Buyers also need to be wary of the impact of the upcoming business rates revaluation.
Although there will still be some time until a wholly positive market emerges, for the cash-investor happy to take a longer-term view, there are some excellent buying opportunities in the market currently to be had.
By Ian Lambert, Investment Partner at Hartnell Taylor Cook.
Originally published in CoStar – Cash Is King in Market so How Can Investors Reign Supreme? (costar.com)