16 Nov

Syndicated investment in London’s rising skyline is growing

Commercial property investment syndicates cash in on building boom.


London is finally and controversially gaining a skyline. Admittedly it might be an assortment of oddly shaped office blocks (think the Gherkin and the Cheesegrater), but developers are looking to plug the growing demand for more space by going up — and up. For investors looking to invest in commercial property, London’s changing cityscape offers a template for other capitals around the world; post-recession, companies are expanding once more — and office space is much in demand.

Property funds and real estate investment trusts (Reits) offer routes into the sector, but direct investment is usually far beyond the reach of the average investor. Buying prime locations in central London, New York or Hong Kong can see the bidding stretch high into the hundreds of millions. Yet while very wealthy private investors — those with more than £30m — have been tapping into this market for years alongside pension funds, for those with £50,000-£100,000, the best way to invest is through a syndicate.

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Investment clubs are nothing new. Family offices frequently join forces and funds to strike private equity deals, for example. But for commercial property investors they offer a chance of accessing both capital growth — when the building is sold — as well as income based on the rent (and the possibility of that growing year by year).

And as the buildings go up, so money pours in. According to figures from Legal & General Property (LGP), more than £60bn was invested in UK commercial property in 2014, up from £52bn the previous year, and almost double the amount that was raised in 2012. Figures for 2015 show that investments so far — at £47bn — have comfortably outstripped where they were this time last year.

The market is split into three main areas: office buildings, retail opportunities and industrial sites, all with varying rates of return. Figures from LGP show that rental growth from central London offices over five years, for example, is running at an annualised 5.4 per cent. Over three years, that stands at 9 per cent, indicating the strength of the recovery over the past few years.

The office building sector remains the healthiest of the three, with retail — particularly High Street stores whether in the US or UK — still struggling to cope with the impact of online shopping. Leisure, another indicator of economic health, has also been strong, says LGP’s Michael Barrie, with many new restaurants opening in capital cities around the world.

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The risks, though, are manifest. Liquidity is an issue, which is why many prefer to invest via a property fund or Reit. However, Druces, the law firm, which helps run three or four commercial property syndicates of about 20 people a month, is keen to stress that a secondary market exists among members of its pools. Certainly, this remains limited, but investors are not reliant on the building or project itself being sold to be able to move on.

Gearing can also be problematic — and Ireland offers a sobering example. Generous tax advantages saw investors pooling their funds to access the property boom. Inevitably they borrowed from domestic lenders, and when the credit crisis hit in 2008, investors suffered a double whammy of failing Irish banks and a collapsing property market.

This is why, explains Marie Hunt, head of research at CBRE Ireland, there is less debt and more equity in today’s property deals. Indeed, she sees equity crowdfunding as the next logical step for the market, particularly in the US. Recent rule changes in the US have meant commercial property developers are now allowed to advertise direct to the public. And investors have been keen. According to Massolution, the consultancy, investment into real estate  crowdfunding is expected to reach $2.6bn in 2015. “This continues to rise,” adds Ms Hunt.

The question of whether a bubble is forming — as many have warned about the residential market — is brushed aside. The fact that building sites remained inactive for a two-to-three-year period after 2008 means there is a gap in the supply pipeline. Hit by the recession, developers literally downed tools.

Yet demand remains strong — and is growing. With supply faltering, investors are already starting to see sharp increases in rents and overall building values. Property funds and Reits will benefit, but investors in syndicates are in the best position to reap returns from both income and capital growth.

With the global economy in recovery mode and building work in full swing, investors’ eyes should focus on the rapidly changing skyline.