By Alan Sippetts, Investment Director, Heartwood Investment Management
We believe that commercial property is set to perform well again in 2015, following a stellar 19.3% return in 2014. Steady economic growth and low interest rates are spurring rising demand for office, industrial and distribution buildings across the UK, at the same time as there is a limited supply of properties in attractive locations, an overhang from the credit crunch.
Based on our research, we expect rising rental growth in London and other UK cities to be a key driver of the market's performance this year. Vacancy rates for quality properties in certain areas of the country have fallen to record lows. Outside of London, rental growth in 2015 is forecast to significantly surpass 2014. Meanwhile, rents in many parts of London remain below their long-term average, leaving room for potential upside.
Furthermore, the strong trend of international investment flows into UK property continues for yield-seeking global investors, evidenced by the notable pick-up in UK investment activity in 2013 that was sustained in 2014. The strength of the US dollar has been instrumental in support of UK assets for both investors based in the US and countries where currencies are pegged to the US dollar, mainly in Asia.
Of course, we are entering a period of political uncertainty as the UK General Election approaches. However, we do not expect international buyers to be deterred, particularly in London, whatever the political outcome. The UK's less onerous regulatory environment stands apart from other international markets, and we expect the UK's legacy of favouring property rights to be preserved.
In consequence, we have positioned our portfolios to capture expectations of rising rental growth and on-going international demand for UK commercial property. We maintain a full weighting in UK property across all of our investment strategies, recently adding to the I-Shares UK Property exchange traded fund, a basket of property companies and real estate investment trusts.