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Institutional real estate investors to enter residential sector in 2014, says Hermes

The next 12 months will see a greater focus from UK institutional investors on the residential sector, as the government looks to find a solution to the housing supply shortage.

That is the view of Chris Taylor, CEO of Hermes Real Estate Investment Management Limited (HREIML).
Hermes’ 2014 property predictions also speculate a trend towards an international real estate diversification that will lead to greater inflows of capital into the UK market.
Taylor says: “This is likely to centre around London, where pricing is ahead of the pre-financial crisis peak and domestic investors will increasingly look to diversify their exposures elsewhere in the UK and across the globe.”
Infrastructure will also shape the future real estate market in London, with major projects like Crossrail becoming a driving force behind redefining the Central London office map and radically altering how occupiers perceive locations. This is evident in areas like King’s Cross, with Google’s decision to occupy one million sq ft, while the opening of Crossrail stations at Tottenham Court Road and Paddington have also galvanised strong demand for nearby properties.
With regards to the retail industry, the yield gap between prime and secondary property is currently at its widest level since 1991, at over 450 bps in the UK. Hermes calculates that relatively attractive returns can therefore be secured by discerning investors in 2014 as the UK economy recovers, particularly for those with an in-depth understanding of the occupational markets.
Taylor says: “The bifurcation within the retail sector will continue, with good opportunities within both the large and dominant destination centres at one extreme, and the smaller and non-discretionary centres at the other, while the medium-sized centres look increasingly vulnerable to technology and on-line shopping.
Hermes also draws attention to the ‘elephant in the room’ for 2014. Taylor says: “However, our confidence in future performance prospects from direct real estate is tempered by the spectre of artificially low interest rates and historically high record levels of debt. We question whether Western economies have yet to really tackle these challenges.”

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