The UK's hidden jewels - exploring the drivers of investment into UK commercial property

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For investors in various asset classes ranging from equities to currencies, the last few years have been tumultuous. However, if there has been a winner in value appreciation, it’s property.
A frenetic 2022 in the UK saw property prices reach all-time highs. While economic headwinds continue to have significant impacts on the purchasing power and living standards of consumers, there is one group that stands to gain – foreign investors. Here James Dixon explores what's driving the UK commercial property investment boom.

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According to Knight Frank, foreign investment in UK commercial property saw a significant post-pandemic rebound, with Middle Eastern investors acquiring over $700m of assets in 2022. In 2023, investment, dominated by private capital from ultra-high net worth individuals, is expected to reach $1bn, with more than a third of this targeted at offices and mixed use. In the past decade, Far East investors averaged 25% of non-domestic investment in UK commercial property assets (Savills), and while this activity cooled due to the pandemic, investment volumes are expected to return to pre-crisis levels.

Currently, overseas investors own around £90bn of property in England and Wales. Among these investors, European and Middle Eastern group have shown a growing interest in UK retail and residential properties, which are becoming a significant component of their portfolios.

The key drivers of investment in the UK

These are our top reasons why the UK is an attractive prospect for acquisitive foreign investment:

  1. Linked rental income, often from blue chip tenants.
  1. The weakening of the pound, which is offering favourable exchange rates.
  1. Opportunity for repricing; due to the fluctuation in currency, energy prices and inflation we’re seeing volatility in debt costs. Cash rich overseas investors are less dependent on loans, meaning private capital is more able to compete against institutional investors and private equity.
  1. Sustainability agenda is driving change in the UK with almost 2.5bn square feet of retail and office space needing upgrading over the next decade.
  1. Well-developed urban environments that are the product of a stable political, legal, planning and building regulation rules

Combined with the UK’s stable and well-developed economy, transparent regulatory framework, political stability, access to London’s financial hub, openness to foreign investment, strong research and development reputation, and the appeal of the English language, the UK remains an appealing prospect.

Retail & Leisure

The property market for retail and leisure is seemingly under-indexed, largely due to the pandemic and economic headwinds forcing many tenants out of business. These sites, especially large retail and leisure (e.g. multiplex cinema) hubs in town centres, can now be found on the market at discounted rates. Property giants M Core have invested more than £160m over 12 months in 25 retail centres including Cwmbran Centre; The Galleries, Washington, Aviemore Retail Park, and Three Spires in Lichfield.

Blended offers

By combining retail, leisure, hospitality, and office space, mixed-use commercial developments offer a comprehensive and diverse range of experiences, making them an attractive proposition to consumers and businesses. The ease of starting or investing in a mixed-use project is another welcoming factor, as English, Scottish and Welsh cities offer flexible planning regulations allowing for funding into such projects. In the UK for example, the government is encouraging development of excess retail space by relaxation of planning laws and regulations. At Kings Road, in London Benoy took a tired retail and office building and created an award winning highly sustainable mixed retail and office buildings, set around a new public square.

Mixed-use residential

Inner city London housing had a 6.5% increase in price in 2022. However, the West Midlands and Northern regions have seen a rise of up to 20%. Cities such as Birmingham, Manchester and Leeds are observing large investments by both the government and private investors into regeneration projects. These projects aim to elevate the status of the cities and its offerings. However, London still leads the way in terms of values, and in particular the outer boroughs (within the M25) particularly with new high speed public transport routes such as the Elizabeth Line, HS2 and the London Orbital to ensure residential values are maintained. Build to Rent and the Private Rented Sector remains the leader in offering investment returns but also co-living, senior living mixed with high quality amenity and retail/​commercial spaces at public facing levels.

Benoy and Pragma’s role

Pragma and Benoy are well placed to help navigate the building market within the UK and, with our many UK company contacts, can assist in finding the right development opportunity, understand its potential and work with the local planning + building regulations to create award wining architecture that will deliver real value to our clients.

The UK residential and retail property market offers an enticing investment proposition for overseas investors. The current cooling trend and declining demand for retail properties in town centres has opened up opportunities for investors to acquire properties at more affordable prices. The stable political environment, strong rental market, potential for capital appreciation, and cultural appeal of the United Kingdom further enhance the attractiveness of this investment avenue. By carefully considering these factors and partnering with trusted local experts, overseas investors can navigate the UK property market and unlock the potential for long-term growth and financial success.