Qualities of Real Estate as an investment Week 2 Real Estate Investment & Valuation- 2017/18 Semester 2 Beatrice Fairley

Reading this week Property Investment David Isaac & John O'Leary Second edition; 2011 Chapter 1

Investment in Real Property - expenditure on the purchase of existing assets: property investment - expenditure on the creation of new fixed assets: property development The property investment market should be regarded as part of the wider investment asset market (with special characteristics).

Qualities of an investment security of capital security of income from the capital invested regularity of income ease of purchase and sale of the investment low cost of purchase and sale of the investment divisibility which enables parts of the investment to be sold off if necessary; and security in real terms, wherein the value increases at least in line with inflation (a hedge against inflation)

Differentiation of property from other asset classes Property is differentiated from other assets by four main factors: It is a physical asset requiring maintenance and suffering depreciation and potentially obsolescence Its income delivery is governed by lease contracts Its supply is inelastic and is regulated by both central and local government policy It is not traded in a centralised market – and as every property is unique, it is valued without the benefit of direct reference to quoted trading prices for identical properties

Real Estate as an Asset The total capital value of all commercial property in the UK in 2005 was estimated to be £762 billion (Investment Property Forum). 33% retail, 26% offices, 21% industrial. Remaining 20% comprised hotels, pubs, leisure outlets and public service buildings. 43% of commercial property by value was estimated by IPF to be owned by investors - hence 57% of commercial property was owner occupied. But investors tend to own the higher value commercial property hence they only own 20% of commercial property by floorspace. And these figures vary across sub-sectors 61% of retail property by value is owned by investors 63% of office property 23% of industrial

Commercial vs Residential property investment markets Investment in commercial real estate is dominated by large investors In contrast residential property investment is mainly small investors

Overseas Investment in the UK Demand from investors in the UK property market rose sharply in the 2 years to 2015 Interest from overseas buyers also continued to pick- up Supply of property for sale remained firmly in decline. (UK Commercial Property Market Survey - Q2, 2015, RICS) Demand for UK property has weakened since then

Overseas Investment in the UK (% Share)

Investment in Real Estate (US$ bn) Global property investment rose 4% over the year to June 2017 (including development land) Excluding development sites, global volumes fell 6.5% London saw volumes fall 25% in the year to June 2017 Investment in Real Estate (US$ bn) Cushman and Wakefield 'Winning in Growth Cities (2017-18)- an annual survey of global commercial real estate investment activity which details the cities most successful at attracting capital.

Cushman and Wakefield 'Winning in Growth Cities (2017-18)

Closing the UK Investment Gap 'London’s overheated commercial property market fuels regions' (FT headline Jan 2014). Close to 59% of investment activity in 2014 took place in the regions, its highest level since 2006, with a similar volume share expected in 2015. The Northern Powerhouse to draw in more than £18bn by 2030. Sheffield Digital Campus - £40m commercial and office development that saw 130,000 sqft of office space built in the city delivered as a result of Chinese investment.

Who invests in commercial property?

Foreign investors set to become the largest owners of UK property 2011 – foreign investors & UK institutions each held 23% of the UK’s £717bn commercial property market. Since 2003 – foreign investors market proportion increased 106% to £76bn, while UK institutions saw a drop of 4%. 2015 – if the trend continues, foreign investors will become the largest owners of UK property.

Investor Types (US$ bn) REITs and private equity funds have been the most prolific buyers globally. High Net Worth Individuals have increased the capital they are investing in the market in the past year. Sovereign Wealth funds have been particularly active, increasing their investment by 44%, followed by PE funds up 26%. Cushman and Wakefield 'Winning in Growth Cities (2015/16)