Background of UK investment market

These days almost any newsworthy statistics seem to be bandied about in billions: Greek debt, National Health Service budget, the cost of new aircraft carriers and the like. But actually how much is a billion pounds? Can we imagine it? A million pounds stacked in £20 notes is 5.56 metres high, about the same as a London Routemaster bus. Therefore a billion pounds similarly stacked would be 5,650 metres high, i.e. 1,000 buses. And 83 billion pounds so stacked would be about 480 kilometres high. That stack, provided that it was not nicked in the meantime, would comfortably reach the moon at any point on its ellipse!

Investment in property can be traced back to the time of the Domesday Book, where, under the feudal system, the relationship of landlord and tenant was effected by the grant of land in exchange for goods and services. 

This feudal system formed the basis of the great landed estates established in the 17th and 18th centuries. There was little change until the Industrial Revolution in the early 19th century when mechanisation and provision of capital revolutionised farming and established the landlord and tenant relationship that we would recognise today. The rapid growth in the trading of stocks and shares in the Victorian era and the emergence of mutual investment societies as well as life insurance companies at the beginning of the 20th century saw the beginnings of investment into classes of property other than agricultural land, i.e. mainly industrial and residential. However, it was not until after the Second World War that investment property became firmly established as an acceptable investment asset class for life insurance companies and pension funds, with the focus upon prime shops and office buildings let on long leases to well-established companies. As confidence in this sector grew the percentage of investment funds placed into property increased so that by the mid 1970s it was not unusual for the major investment funds to be allocating some 20%-25% of their total assets into property. 

Since that time percentages in allocations amongst these asset classes have varied but property throughout the years has been perceived as providing diversification of risk with secure income and the prospect of both rental and capital growth. This institutional enthusiasm for UK property expanded in recent decades to include shopping centres, retail, warehouse parks, industrial estates and food stores. 

The residential sector fell out of favour in the face of successive governments who introduced well-intentioned legislation to protect residential tenants from unscrupulous landlords. Indeed in the 1950s and 1960s there had been an exploitation of tenants by landlords, which became known as Rachmanism – after one particularly notorious landlord – which further discouraged respectable investment funds not wishing to be associated with this. In consequence the massive post-war demand for housing was largely provided through owner-occupation financed by building societies and council housing. 

In the early 1970s the government relaxed statutory controls, resulting in the revival of residential investment from both the private “buy to let” and the corporate sectors. Emerging from both was investment in student accommodation.

However, the virtual collapse of the UK banking system in 2007 combined with the international credit crunch resulted in the value of commercial property in the UK falling by over 50% over the following three years. 

As highlighted by James Carrick, of Legal and General, this has resulted in many of the banks calling in loans and fire sales of property investments in an effort to recoup at least a percentage of debt taken on in the halcyon years up to 2007 when corporate and private investors were seeking ever higher returns from property through gearing. Nor has the residential market, both owner-occupier and buy-to-let sectors, been immune from this reversal in values as illustrated in IPD reports. 

Morgan Pryce is a specialist tenant acquisition agent with offices in Oxford Circus and the City. Morgan Pryce specialises in search, negotiation and project management and works exclusively for tenants.