Look back, face forward

16 Pages·2017·1.46 MB·English

A review of 2017 and predictions for 2018 1
Look back,
face forward
A review of 2017
and our predictions for 2018
January 2018
kpmg.comk/u
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member
frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2 Look back,face forward
Introduction
After a slow start to the year, UK
commercial real estate transaction
volumes were relatively healthy
in 2017. Prospects for 2018
are mixed but overall the UK
remains an attractive destination
for  investors.
Keeping overseas investors keen
Although transaction volumes have been robust,
this masks a drop in the actual number of deals.
Large trophy acquisitions by non‑domestic
and prominently East Asian investors, such as
the Walkie Talkie and Cheesegrater buildings,
bolstered volumes in 2017. Whilst this apparent
reliance on overseas capital may concern
some commentators, the pound is expected to
remain weak through 2018 and UK commercial
property yields are comparatively high against
the European and Asian markets. We expect
that Chinese capital will continue to target the
UK market, despite the clampdown on overseas
investments by the Chinese government.
Perhaps of greater concern is the announcement
in November’s Autumn Budget that
non‑residents will be charged capital gains tax on
the increase in value of UK investment property
from April 2019. Although there are expected to
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member
frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
A review of 2017 and predictions for 2018 3
be some exemptions, we have already seen some Technology and long-term trends
deals stalling as a result of this announcement. The Though Brexit remains a hot topic, I would argue
Government needs to be careful to avoid reducing that there are longer‑term trends that will have
the attractiveness of the UK property market to a far more profound impact on the industry. The
overseas investors as they iron out the fner details automation of white collar jobs, as technologies
of this change. such as robotics and artifcial intelligence
progress, will have a major effect on demand
Looking beyond core
for offce space. Urban environments will also
With a fight to prime as a result of ongoing
be transformed by autonomous vehicles and the
political and economic uncertainty, and global
advent of mobility as a service: vast swathes of
investors dominating the market, competition
parking space and redundant wide multi‑lane roads
for assets is high. Investors are often fnding ten
will offer interesting repurposing opportunities.
other buyers willing to pay the same price or
These changes may seem some way off but
more for assets they are bidding for, which makes
technological change is rapid, and the long‑term
sticking to risk and pricing criteria diffcult. With
nature of buildings mean that investors and
some investors adopting a wait‑and‑see approach,
developers should be taking them into account
there are also fewer assets on the market in
now to avoid expensive retroftting or building
many sectors. As this trend continues into 2018,
obsolescence.
investors are likely to increasingly look at value‑add
opportunities in non‑prime Technology is also reshaping
markets, where competition how the real estate sector
is less ferce and prices itself operates. Our recent
Investors are often fnding ten
are more appealing. Global PropTech Survey,
Income‑producing assets, other buyers willing to pay the Bridging the Gap, illustrates
such as logistics, PRS and same price or more for assets that the industry now
serviced offces, should recognises the value that
they are bidding for, which
remain highly attractive in PropTech can bring, with 86%
makes sticking to risk and pricing
the year ahead, with more saying that they view digital
players seeking to enter criteria diffcult and technology innovation as
these markets. Consumer an opportunity. Having gone
demand for fexibility will also be refected in the through a period of acceptance over the last 12 to
steady rise of sectors such as co‑working. 18 months, it will be interesting to see if 2018 can
be the year of adoption.
London holds its own
In terms of Brexit, the occupier response has so far We expect to see more frms making better
been pragmatic. Banks and other fnancial services use of their data to improve areas such as
occupiers are paying close attention to the decision making, customer service and building
negotiations and there has been talk of relocations optimisation. Innovation and digital strategy will
to the likes of Frankfurt, Paris and Dublin. Yet it also continue to rise up executives’ agendas as
looks unlikely that London’s role at the centre of FS the sector adapts to the digital age. Expect to see
is about to end any time soon. more frms looking to appoint roles such as chief
technology, innovation and data offcers, and the
The factors that make London attractive to
establishment of multi‑discipline innovation boards.
occupiers – language, timezone, transparency, rule
of law, an established ecosystem of expertise and Finally, December saw two major public markets
a history of adapting to global change – remain transactions announced, with Unibail‑Rodamco
in place and are not going to change overnight. acquiring Westfeld and Hammerson merging
Furthermore, the sheer size of London’s fnancial with Intu. A number of REITs continue to trade at
services sector makes it diffcult to conceive of a discount to NAV, meaning there could well be
another city having the capacity to take up the further public markets M&A activity in 2018.
baton. The UK property market also continues
to offer comparatively less risky investment
opportunities, particularly for institutional investors

looking to deploy long‑term capital.
Andy Pyle
UK Head of Real Estate
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member
frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4 Look back,face forward
Market trends
for 2018
Tax
UK ta x atu horities have ptu property nu der the spotlight for a nmu ber of
years now and 2017 was no ecx eption. In the 2017 Atu mu n duB get the UK
Chancellor annonu ced that from April 201,9 non-UK residents will be charged
capital gains ta x on the increase in valeu of all UK investment property.
This pivotal move will directly than to income ta x as at present).
impact a signifcant proportion of The Government plans to pbu lish
the overseas players that invest in draft legislation for conslu tation in
the UK property market, and whilst smu mer 2018, with the change
there will be some eex mptions, for taking effect from 6 April 2020. This
eax mple sovereign immnu e investors wolu d also mean that gains arising
and pension schemes, they colu d to non-resident companies on the
also still be indirectly affected by the disposal of UK property will move
change depending on the natru e of from capital gains ta x to corporation
their holding strcu tru e. ta x from April 2020.
This has the potential to prodcu e 2017 also saw the Corporate Interest
a shift in deals activity in 2018, eR striction (CI)R rlu es (or PEB S
particlu arly given the proportion of Action )4 come into play following
overseas investors active in the UK a series of amendments, the last of
market. According to eR al Capital which were annonu ced in eD cember.
Analytics data, cross-border investors rB oadly speaking, these rlu es limit
have consistently acconu ted for a gropu s’ UK ta x dedcu tions for its
50 % or more of total UK commercial net interest expense to the lower of
property transactions for the past a percentage of the UK ta x IBE ATD ,
fve years. Whether this will be a taken from the ta x comptu ations, and
short-term impact as investors adsuj t a measru e of the net gropu interest
to the change, or a more long-term expense, taken from the gropu
deterrent, remains to acconu ts. The application of the
be seen. CI R rlu es can be very complicated
in practice, and the devil is very
International investors are also the mcu h in the detail. With this in mind,
focsu of a proposed change that KPMG has ptu together a series of
will see non-UK resident companies articles which can be fonu d in oru
that rnu a UK property bsu iness, PEB S Action 4 iD ary , where we
or have other UK property income, look at the detail of the rlu es in ‘bite
charged to corporation ta x (rather siez d c� hnu ks.’
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member
frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
A review of 2017 and predictions for 2018 5
KPMG’s capital allowances team
identifed expenditure qualifying
for tax relief of c.£80m across
15,000 beds in the student
accommodation sector. The team
of tax experts and chartered
surveyors have worked across
single asset acquisitions,
portfolio acquisitions and
new build construction
projects to secure the
capital allowances.
Debt
The trend of increased participant numbers in the UK debt market continued in
2017 and there is a more diverse pool of lenders than ever before. Insru ance
companies, pension fnu ds, asset managers, debt fnu ds and alternative lenders
are all competing for different types of business.
eW saw record low syndicated deal �• UK clearers are fnding pricing
activity in 2017, which signals three on the best investment grade
key trends. Firstly, that overseas credits too tight for their reglu atory
buyers are bringing their own debt or model without signifcant ancillary
wholly eqiu ty fnu ding ; secondly, more business. This poses some risk to
club deals with fnancing are being UK borrowers without diversifed
directly placed with institutions in the access to different markets.
primary market ; and fnally, there is
�• Banks are nu der increased
less transparency on deal terms in the
reglu atory capital pressru es,
market.
and ring-fencing and new IFRS
standards are also potentially
Despite a slight tempering of lending
making themselves felt.
levels by the Brexit vote, the UK real
estate debt market remains relatively
�• Apartments, and biu lt-to-rent, are
liqiu d. However, there are a few key
becoming increasingly poplu ar as
themes for the coming year and
investors look to income-producing
beyond:
assets. This poses a number of
nu knowns to fnancers – a lack of
�• Despite a strong development
comparables and benchmarking,
debt market in 2016, capacity
additional intangible value, and less
does remain focused on the
secru ity of tenure and tenant credit
best opportunities. A number
quality, to name a few. A degree of
of the (limited) participants are
�exibility in the traditional valuation
now slightly overweight on
criteria of real estate is reqiu red to
development, and residential
succeed in fnancing this sector
development in particlu ar is an area
– and with the rising poplu arity of
that is nu derserved.
these models, lenders wolu d be
wise to adapt.
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member
frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
6 Look back,face forward
Equity capital markets Restructuring
eD spite global eiuq ty capital markets (CE M) volmu es eW are predicting that 2018 will see the retru n of the CAV .
recording a modest year-on-year decline in the second
half of the year, 2017 is on track to set a new record for flu l
year global CE M issau nce. With headline eiuq ty indices
registering gains and market volatility remaining low, IPO
activity in particlu ar was robsu t in the second half.
Regionally, while reduced eW believe that 2018 is The perfect storm that is small niche players all the
issuance in China and the likely to start off strongly sru ronu ding the casual way through to the larger
US led global issuance was and continue 2017s’ dining and retail sector national players. This will
lower, ruE ope saw a strong momentum. However, at the moment will bring reslu t in landlords having
recovery in IP O activity in as the year goes on, it a raft of restructru ings to deal with yield pressru e
the second half. In the UK, is possible that volatility in the marketplace, with and empty premises –
there was a notable shift will increase as macro the main real estate creating a knock-on impact
in the mi x of ECM activity and political factors make impact coming from CAV for their own capital
with healthy IP O volumes themselves felt, especially proposals to compromise structru es and ability to
offsetting more limited in the UK. eW wolu d advise rents and payment terms service debt commitments
follow-on issuance. clients to prepare early to together with a rise in store where highlyg� eared.
take advantage of, what are closru es. This is driven
Real Estate proved In tru n this will create
likely to be, short windows by pressru e on consumer
particlu arly resilient opportnu ities. eW predict
of opportunity. spending, cost in�ation,
throughout 2017 in the that �exible and liqiu d fnu ds
labour price increases/
UK, raising £5,74 7m via 42 will be increasing active in
shortages and the new
deals, of which 10 were looking for opportnu ities
business rates regime.
IPOs raising £1,715m. to acqiu re distressed real
The impact is being felt estate, either single asset
across the market from or portfolio.
KPMG advised Sirius Real Estate

Limited on their transition from

AIM to the Main Market in March

2017. SREL had a market

capitalisation of £415m
on admission to the Main

Market of the London Stock

Exchange and maintains a

secondary listing on

the Johannesburg

Stock Exchange.
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A review of 2017 and predictions for 2018 7
Accounting
Following a 2016 transitioning from ‘old UK GAAP’,
2017 was a relatively quiet year for many real estate
accountants. The accounting world is now preparing
itself for a triumvirate of new standards: IFRS 9
Financial Instruments, IFRS 15 Revenue from Contracts
with Customers (both applicable from 1 January 2018)
and IFRS 16 Leases (applicable from 1 January 2019). There is talk in the industry on
whether tenants’ commercial
evaluation of rent clauses will
The implementation of In November 2017 the FRC
these standards is a major released its thematic review change as they bring their lease
undertaking for many into alternative performance
liabilities ‘on balance sheet’.
industries, however real measures. Consistent
estate investors beneft with our observations of
from lease income being the real estate sector, all
out of scope of the new companies reviewed used
revenue standard and an ‘alternative’ measure of
there being no substantial proft. Whilst commonly
changes to accounting quoted, EPRA earnings
for lessors of investment tends not to be the primary
property. alternative proft measure
used by the listed real
There is talk in the industry
estate sector, with other
on whether tenants’
proft items often being
commercial evaluation of
excluded beyond those
rent clauses will change
required by EPRA. Ensuring
as they bring their lease KPMG advised Bridgepoint on their
transparency of adopted
liabilities ‘on balance sheet’. acquisition of UK housebuilder Miller
measures, and balancing
Shorter lease terms, leases Homes for £655m. Established in 1934,
their prominence against
with market rather than Edinburgh-‑based Miller Homes is the
GAAP measures, remains
fxed uplifts and a higher largest privately-‑owned housebuilder
a stated focus area for
proportion of rent linked in the UK, with a large regional
the regulator and should
to turnover would reduce footprint through three divisions
continue to be an agenda
accounting liabilities for (Midlands & South,
item for Audit Committees
tenants. Whether landlords North, and
and their auditor.
will be amenable to such Scotland).
requests and what they will
require in return remains
to be seen. And if such a
change does occur, how will
valuations be affected?
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network
of independent member frms affliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
8 Look back,face forward
Private Rented Sector (PRS) & Build to Rent (BtR)
There was increased momentum in the sector in 2017, with over 95,000
build to rent units either completed or planned across the UK and circa
17,000 completed, according to the British Property Federation’s build to
rent map. The housing crisis continues, with demand outweighing supply.
There still remains limited local housing solutions. There
transactional evidence in the will also be a higher volume of
market. However this has improved, investment and forward-‑funding
especially in London where net deals in the market with institutional,
yields of sub-‑4% are being achieved. public bodies and overseas interest.
For 2018, public / private As the market matures, there will be
partnerships in the sector are more evidence on operating costs,
likely to increase, given the strong rental levels and let up periods
long-‑run investment fundamentals which will assist with valuations and
for PRS and the need to provide investor confdence in the market.
KPMG is advising EcoWorld International Berhad on their
acquisition of a 70% stake in Be Living, Willmott Dixon’s
residential development business. The joint venture will also
develop 12 sites in Greater London and the South East of
England, with sites being acquired in two stages over 2018.
KPMG advised global real estate company Greystar on their
acquisition of two plots from Royal Mail plc on its Nine Elms
site in London. Greystar plans to develop purpose-b‑ uilt,
high-‑end apartments and a range of amenities with partner
Telford Homes.
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member
frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
A review of 2017 and predictions for 2018 9
Hotels and leisure
Despite signifcant challenges facing the sector, UK hotels continued to
perform strongly in 2017. This was helped by the sustained infux of overseas
visitors attracted by the pound being at its lowest level for many years.
Transaction volumes have also been maintained with a number of signifcant
portfolios trading, in the market or rumoured to be about to be launched:
that includes Q hotels, Jury’s Inn, and the Principal & DeVere brands. Asian
investors in particular continue to look for UK opportunities in the sector.
2018 may be more challenging already trying to identify alternative
as economic growth is expected labour pools.
to slow in the UK, whilst labour
and other costs increase and Finally, we are likely to see further
more supply comes on stream. expansion into adjacent sectors such
This is likely to be compounded by as serviced accommodation, with
continuing Brexit and international owners and investors expecting
uncertainty. A number of groups consolidation as demand grows.
operating hotels in the UK are
KPMG advised UK-based real estate investment company
Aprirose on their aciuq sition of the Qhotels portfolio from Bain
Capital Credit and Canyon Partners. The portfolio of 2 6 UK
hotels totalling ,3 680 beds was aciuq red for a smu of £25 5m.
KPMG advised Swedish hotel group Pando x on their
acqiu sition of 37 hotels including the Jru ys Inn chain from
Lone Star for £800m. The transaction was made with Fattal
Hotels Group (“Leonardo”) as operating partner. Following
a reorganisation of the portfolio, Parado x will retain 20
investment properties and one operating property in the
UK and Ireland, and Leonardo will aciuq re the operational
platform with 3 6 hotel operations nu der the ruJ ys Inn brand.
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member
frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
10 Look back,face forward
Student Acommodation
There continues to be strong investor appetite in the sector, despite Brexit
looming and a drop in the number of university applicants. There has been
a fight to quality – schemes located in the right place within the right
university locations.
Investors have been both UK‑based Developers will look to produce
and from overseas and there are some a cost‑effective product due to
substantial student accommodation the increased costs of labour
portfolios in the market, which are and materials, so there could be
expected to close towards the end of more modular and space effcient
2017 or early 2018. schemes. With the increases
in fees, affordability and ‘value
For 2018, UK developers and
for money’ will also be vital
investors will continue to expand
for students.
outside of the UK and into Europe,
in the search of yield.
KPMG advised i Q Stdu ent Accommodation on their
aciuq sition of Pru e Stdu ent Living and its portfolio of 11 sites
in Bath, rB istol, dE inbru gh, London and oY rk.
KPMG advised Greystar and oj int ventru e partners AXA
Investment Managers – eR al Assets and C ER B Global
Investment Partners (both acting on behalf of clients) on their
aciuq sition of the Spanish stdu ent accommodation portfolio
eR sa. AXA IM - eR al Assets and C ER B GIP aciuq red eauq l siez d
shares representing the sbu stantial maoj rity holding in the
portfolio, while Greystar, who will act as property, development
and asset manager for the portfolio, pru chased the remaining
balance. hT e deal represents the largest investment transaction
in stdu ent hosu ing on the Iberian Peninslu a.
© 2018 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member
frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.