Global Capital…An Alternative Thought

International investors have long been dominating the headlines with regards to the UK real estate investment market, and my recent travels have done nothing but re-affirm the continued level of appetite for UK assets.

Global equity remains resolute, with an estimated £37 billion targeting Central London offices, and there is no shortage of new capital emerging to acquire landmark assets. The recent £1bn purchase of 5 Broadgate by HK investor, CK Asset Holdings, only serves to highlight this.

It is evident in conversations around the globe, that alternatives are not so alternative! A figure which has struck me recently is the volume of global capital that is evaluating the Alternatives sector. Over the last ten years, overseas investment has accounted for 28% of the value of all alternative transactions, with that proportion even higher last year when it accounted for 35%. In the record breaking 2015, overseas investors accounted for almost 50% of total transactions in the sector. This increasing dominance has led to significant pricing shifts and as we see multi-family defining itself as an acceptable and investable asset class in the UK, global demand is rising rapidly for exposure.

Indeed, in the UK, Alternatives have outperformed ‘darling of the sector’ industrials for the past ten years. Despite huge interest in the industrial sector last year, which took its share of investment volumes to 17% in 2017, it was unable to keep pace with Alternatives, whose share reached 34%. The sector has also been outperforming retail for the last five years and has matched offices for the past three years. International interest in the sector is only set to follow this trend and I am sure it won’t be long before the sector pulls into the lead on a permanent basis.

Add to this that the growth in investment is being matched by debt provision, the sector looks set to continue its meteoric rise. According to De Montfort, the share of UK loan books accounted for by the Alternatives sector soared from 10% to 25% in the ten years to 2016.

Another trend we are noticing is the growth in international debt moving into the UK market. According to the Cass UK Commercial Real Estate 2017 Lending Report, origination of debt by UK banks has fallen by a third since 2008 and much of the slack has been absorbed by overseas lenders. There is increasing appetite from non-UK banks to gain exposure to the UK market and they are offering competitive terms. Additionally, international investors from Asia and the Middle East who as we know have dominated the UK market for the past few years, particularly in London, typically source debt from their own domestic lenders, further reducing the market share of home grown lenders.

As the global attractiveness of all UK sectors increases, we can expect the spread of debt provision to become more varied with it. Having witnessed the growth of US debt providers and align themselves with the UK market over the past decade, we should not be surprised with the wider growth from Asian lenders.

Across the UK equity and debt markets, the appeal continues, no matter where we view the cycle. Hotels, multi-family, student housing, healthcare and car parks all have a global position and their role in our market is more prominent than most would believe!

By Chris Brett, Head of International Capital Markets, CBRE.