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Finance | 1 Jul 2007

The UK property market still offers charities what they need, argues Andrew Allen.

It is well known that the UK commercial property market has delivered very strong returns in recent years and many investors now wonder whether they should diversify their property investments into Europe. However, attractive returns can still be achieved in the UK without the added risks of currency, information, management quality and so on.

While the UK is the fourth largest economy in Europe, it has the largest, and most professional property market. The Royal Institution of Chartered Surveyors (RICS), the governing professional body in the UK, is respected and well governed and has no equal in Europe. The UK accounts for nearly 40 per cent of Europe’s institutional property market, according to the Investment Property Databank (IPD), or more than double the size suggested by the size of its economy. It attracts investment from across the globe and is arguably one of the world’s most international markets, for both occupiers and investors. One consequence of this is that many UK investors who invest in Europe are often surprised by the limited amount of information they receive.

One of the reasons investors cite for investing beyond the UK is the prospect of higher returns from higher growth economies. This can pose some risks. Firstly, the prospective growth of the UK economy is at least as good as the other large economies of Europe, indeed when we consider recent volatility in Germany, the UK stands out as remarkably resilient. Secondly, while there is significant GDP growth in Europe, it is in the smaller countries at Europe’s periphery. However, these economies are small and their property investment markets are significantly less developed than that of the UK.

While exposure to high growth economies could be justified if other investment issues could be resolved, supply is also an important consideration. The planning policies of each country in Europe differ markedly from the UK and this is having critical implications for investors in some markets. For example, while Poland’s economic growth is enviable, the potential stock of shopping centres in Warsaw could triple within five years leading to oversupply.

Income security is always an issue for property investors and the lease obligations in force in the UK have distinct benefits over much of Europe. The UK’s lease and tenancy obligations strongly favour the landlord, placing the onus of repair and maintenance on the tenant, not the property owner. Such obligations are very different in Europe and investors can underestimate the impact such conditions will have on their ultimate returns. A consequence of this is that yields quoted on the continent while often seemingly high, frequently require deductions of costs to make them comparable to those in the UK. While commercial leases in the UK are shortening, now averaging around 10 years, in Europe they are usually much shorter than this.

Although investment should not be driven by tax, stamp duty can also reduce returns, but charities have the benefit of being exempt from it in the UK for purchases over £500,000, however, they are not exempt in Europe where these types of fees can be as high as 9 per cent. Other costs can be also be significant, for example, agents’ introductory fees can be up to 3 per cent in Germany compared to 1 per cent in the UK.

Consensus studies suggest that the UK property market will return around 7 per cent per annum in the five year period 2007 to 2011. Our research found that the target returns from the largest 25 balanced European property funds will average 7.5 per cent. Investors should question why they are looking to Europe when similar returns might be delivered at home. 

Andrew Allen is fund director of the Charities Property Fund 

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