Investment in the UK Real Estate Market

By Alan A. Samson and Richard Wilkinson

Relative to other classes of investment, real estate in the UK remains strong and continues to outperform equities. At the end of 2001, unleveraged returns were circa 7%. As equity markets continue their decline and interest rates remain low, the UK real estate market remains a sound and popular destination for U.S.investment.

Contributing factors:

London's position as Europe's premier financial centre

High levels of liquidity

Strict planning controls and building standards which help minimize the risks of falling capital values

Relatively low taxation and the exemption of foreign investors from capital gains tax

Institutional, long-term (15 years +) leases which favour landlords, incorporating upward only rent reviews

Low interest rates, currently 4%

In 2001, foreign investment in UK real estate amounted to £5.7 billion, representing almost 20% of total investment. A recent report determined that US investment in UK real estate dominates, accounting for £2.3 billion or 40%, followed by Ireland, the United Arab Emirates, Australia and Germany.1 U.S. opportunity funds recently active in the UK market include AEW Capital Management, Apollo International Real Estate Fund, Blackstone Group, GE Capital Real Estate, J E Robert, Doughty Hanson, Lehman Brothers, Morgan Stanley Real Estate Fund, J P Morgan Chase, Praedium Group, Westbrook Partners and Goldman Sachs' Whitehall Fund. U.S. institutions, while less aggressive, have also been active (including MetLife and Teachers).

Some of the more notable recent U.S. backed deals include:

Thayer Properties' (a Lehman backed vehicle) acquisition of Burford Properties for £920 million;

Westbrook Partners' purchase of a mixed portfolio of 20 buildings for £365 million;

Peabody Global Real Estate's (a joint venture between J P Morgan Chase and the O'Connor Group) purchase of Cutlers Gardens, London, for £300 million; and

The Blackstone Group's and JER Partners' joint venture purchase of an office portfolio for £200 million.

Central London attracts the vast majority of U.S. investment. As rental growth is expected to be limited over the next 18 months or so, well-located assets with secure income streams continue to command a premium. UK insurance companies and pension funds, absent from the buy side in the market for a while, are now back in with a healthy appetite for investment stock. This is largely due to internal weighting requirements, given the poor...