Managing Director Stephen Salloway highlights a surge of local demand in commercial real estate investment product and recalls this wasn't always the case.
I'm feeling a little nostalgic this month because Salloway Property Consultants is about to move into its 25th year - where has the time gone? Since 1993, when I started the business, I believe it has grown to become a noteworthy player in the East Midlands commercial property scene. Over the years, we've advised on some incredible projects and sought to be active participants in the debates and decisions that have shaped our city and our region.
This anniversary got me thinking how the dynamics of the local market have changed in the last 25 years. Derby has seen some major developments in that time; Pride Park, the Intu Shopping Centre, Derby Royal Hospital, the Roundhouse, to name just a few of the more eye-catching examples. But rather than focus on the obvious, it occurs to me that one of the most significant changes is far less tangible - it is the role that commercial property now plays as an investment product - especially for small and medium sized investors.
In the early 1990's, bank base rate had been as high as 13.87% with suggestions that it could even rise to an eye-watering 15% after the UK had left the ERM. In this fiscal environment, if you were lucky enough to have money to invest, you just threw it in a savings account and got an 8% return, simple. Better still, if you tied your money up for 10 years in UK Government Bond Yields, you would be guaranteed 9.75%!
Is it any wonder, given these returns, that commercial real estate was not seen as a significant asset class to investors? It represented just over 2% of 'institutional' portfolios (bank, pension fund and insurance assets) with stocks, shares and bonds being preferred. The role of commercial property as an investment was probably at an all-time low.
This has changed dramatically over the last 25 years. If you plot a graph from 1993 to today, interest rates and bond yields have fallen, sometimes in dramatic slumps, to today's rates of just 0.25% and 1% respectively. Conversely, if you plot participation in commercial real estate ownership, you'll see it going in the other direction, from virtually nothing to over 20% today. The correlation here is not a fluke and it's clearly being represented in Derby's market.
The early 1990's saw the emergence of the SIPP which gave more freedom to individuals to control their pension pots. Banks were very keen to fund commercial property purchases and SIPPs could borrow up to 75% of the value of the property. This was a very attractive proposition until 'A Day' in 2006 when SIPP borrowing rules changed. Indeed, there was something of a frenzy in 2005 with many small commercial buildings – offices on Pride Park being a prime example – being developed to feed the appetite of the SIPP's.
In more recent times it has been historically low interest rates which have served to maintain the strength of desire for commercial property investment. Institutional investors have used the availability of cheap finance to leverage strong returns on assets acquired against strict assessment criteria including tenant covenant strength and rental growth prospects. Conversely, local private investors can be less exacting. In many instances they are content to invest in good quality, well-located stock, as long as it is lettable and is the right lot size. This is an important dynamic in the market. It's our experience that as well as institutional activity there is a strong local appetite for investment opportunities in Derby, across all sectors, industrial, office and retail, which is significant driver in terms of the city's continued regeneration.
By way of recent example, we recently launched the first two phases of Ivygrove Developments' Eagle Park scheme on Alfreton Road – 10 x 5,000 sq.ft. light industrial units. Within a few days, we had reached agreements to sell every one of the units 'off-plan'. All of the buyers are local investors. So where I used to see Derby as an 'owner-occupier' location, I believe there is now a better balance between leased, investor-owned property (including SIPPs/pension funds) and owner-occupied property.
A contemporary topic that flows directly from the importance of investors providing an exit for developers is the relatively new build-to-rent/private rented residential sector (PRS) model that no doubt features high on the agenda at June's Derby Property Summit. This is an emerging investment model, seen more as commercial than residential. Whilst market rents for quality apartments in Derby are lower than in some of the major provincial cities, institutions are becoming increasingly interested in the product and investment yields of 4% or even less are being considered, making Derby a very viable option. Consequently, these schemes are happening in Derby now.
Without the involvement of institutional investors many of our major commercial schemes would not get out of the ground. However, over the last 25 years it is the emergence of private investors and SIPPs as key players in commercial real estate investment that has been most noticeable. Through their expanding trust in real estate as an investment asset class, these organisations have helped to maintain a development pipeline and the rental income they receive is recycled to the benefit of the local economy.
It has been a privilege for Salloway Property Consultants to advise both local and institutional investors, developers, tenants and lending institutions over the last 25 years and we look forward to continuing our active involvement in the commercial property market.
Should you have any queries about commercial property investment in Derby, or the East Midlands real estate market generally, please do hesitate to contact Salloway Property Consultants on 01332 298000 or firstname.lastname@example.org and we will be happy to discuss your requirements.