Copyright: David Lawson/Financial Times 1996
UK institutions have always spread money across the country, otherwise there would be no Metro Centre in Gateshead, nor office blocks in Manchester. But that step across the M25 has tended to be thought of as a step down. Overseas investors are even more confined, but the proportion of money going outside London more than doubled to almost 30 per cent as 195 million pounds went to the regions in the first six months of this year, according to DTZ Debenham Thorpe's annual survey published last week [SEPT6]. This includes blockbuster deals such as CGI's 35 million pound purchase of the Arcades Centre in Ashton under Lyme and the 42 million pounds laid out by Middle East investors for a Birmingham office block. More are likely, as there is not enough London property available at required yields of around 8 per cent.
Private German investors have faded since long-term money rates rose, but open-ended funds, which have spent 1.5 billion pounds in the UK, show no signs of easing up, says Mark Kingston, of lawyers Nabarro Nathanson, who has acted for groups like BfG Immo Invest. This is bringing a new focus to arguments that UK investors should be in the same hunting pack. Many still long for the good old days when you could do no wrong putting money into West End offices. In fact, London is still the focus for property commentators, who singing in almost perfect harmony about the joys of prospective rent growth after years of stagnation. But dissenting voices are emerging.
'The capital will undoubtedly do well over the next couple of years but that is not the whole story,' says Nick Wilson, an analyst with Fletcher King. Weight of money is driving the London market but investors are becoming more receptive to alternatives after burning their fingers in the crash - and weary of hearing the same tune about rent rises several years in a row. This change of emphasis is being fed by better research and more sophisticated methods of analysis which rely not just on relative rewards but also risk and volatility. The Investment Property Databank has now been around long enough to provide a base for long-term calculations. 'There is a lot more data around than 10 years ago, and this has opened the door to using other statistical techniques,' says Angus McIntosh, head of research at Richard Ellis.
These include "beta coefficients", which can test the impact of buying and selling an asset on both the volatility and return of a portfolio. The technique has long been part of the equity analyst's armoury in portfolio management, but it has required a change of attitude among fund managers and development of comprehensive databases to make them feasible for property. 'It shows the key to performance is not just comparison of rents but also their volatility,' says McIntosh. That, in turn, helps judge when to get in and out of a particular market. London property, for instance, is attractive because of premium rents but it has also proven costly to investors who suffered a 50 per cent drop in values after the crash. Other assets - and regions - which seemed less attractive have suffered less.
Short-term investors such as property companies are using volatility measures to decide when to get into regions which are set to recover much faster. Funds tend to be left behind by the more nimble trader-developers but can use the same techniques to choose a low beta coefficient, indicating the longer-term stability they seek. 'This will never replace an anecdotal understanding of the market but adds an extra tool for decision-making,' says McIntosh.
Adding the new dimension of risk has thrown a new light on market sectors and the regions, according to a study by Fuller Peiser Research. An analysis of IPD data between 1980 and 1994 reveals that offices were the most risky investment, showing both lowest total and risk-adjusted returns. "And the further away investment is from London, the greater the investment rewards," says the report. In the office sector, for instance, the Midlands and North had the highest risk-adjusted returns. These regions and Scotland also showed the lowest volatility in returns.
Diversification requires more than just an intimate knowledge of the IPD database, however. Detailed local information is vital, says Wilson. And he is not convinced that some of the regional models are sufficiently robust. 'These can include economies which are totally unrelated,' he says. 'In the west Midlands, for instance, some are heavily reliant on the fortunes of the car industry while others are not.' He would prefer to see information on individual towns - perhaps the top 300 office centres, top 200 industrial ones and a thousand retail markets.
These must also be backed up by figures on internal rates of return, local economic analysis and historical rent patterns - all updated at six-monthly intervals. This would reveal where rents were ticking along below their potential, providing an opportunity for future performance - and the sustainability of increases. Not everyone is as convinced, however. John Heatherington, an analyst with Chesterton, says the underlying statistical assumptions are not universally accepted. Allocating between regions would also make sense only if local economies were vastly different. 'There would be little point in investing in two regions like the south-west and east Anglia, where defence spending formed a major part of the economy,' he says.
Yields can be a problem. Central London changes automatically produce pro-rata moves in the provinces, negating diversification benefits. There is still a case for choosing between London and the provinces but he sees more sense in sectors such as retail diversifying across town types such as regional centres, seaside resorts, etc, regardless of the region.