Private investment in commercial property hit an all-time high in 2003 - a year that saw the overall amount of money pumped into this sector rise by 25 per cent.

The upsurge saw the investment total nudge #1.5 billion in the West Midlands, according to a new report from Lambert Smith Hampton.

As a result, the region jumped from seventh to fourth - out of 12 - most active in the UK in terms of deal value.

Birmingham accounted for more than a third of the West Midlands investment total, with the largest slice of trading activity in the office market and retail scoring the most significant increase in transactions - almost doubling #626 million.

Lambert Smith Hampton investment director Jeremy Pearson highlights the activity of private investors as the major change in the commercial property investment market during 2003 - and he predicts that the market is likely to remain buoyant.

That forecast is at odds with the warning from rival commercial property agency Knight Frank, which reports that locally-based private investors are finding it hard to compete as cash-rich institutional funds turn their attention towards smaller and quirkier deals.

According to Knight Frank's Ashley Hudson, South-eastbased investors are becoming increasingly aggressive as they are being out-bid in their traditional market.

Both agents agree that property is in short supply. "In the West Midlands, the desire for commercial property investments remains unabated with a general lack of liquidity in the market," says Mr Pearson, referring to LSH's latest UK Investment Transactions report, based on transaction data from Property Data and the agency's research department.

"Investors are reluctant to sell property as they will struggle to find another better investment. Properties that do come to the market generally go straight to best offers."

According to the report, net investment by private investors reached its highest ever levels during 2003, with overall exposure to the UK commercial property market rising by #5.7 billion - almost three times the figure recorded for 2002.

Only London, the South-east and the North-west topped the West Midlands, with total UK tran#29.2 billion in 2003 - up #1 billion.

This was partly due to the surge of activity ahead of stamp duty changes, enforced at the beginning of December, which resulted in the final quarterly figure climbing to #9.4 billion.

"It was a very interesting year and, despite the rise in interest rates that we saw in the second half of the year, debt-backed investors have continued to play a significant role in the marketplace," Mr Pearson tells Business Property Review .

"The current view is that their involvement might ease a little if interest rates continue to rise but, with institutional investors now ready to fill the gap, market activity looks set to remain buoyant.

"Private investors are now aware of the benefits of a stable income stream, with the added advantages of rental and capital appreciation. In addition, it seems that, following the disappointing performance of the equities market and its impact on pension surpluses and insurance bonus levels, asset allocators are more willing to accept the more stable return profile that commercial property offers."

Knight Frank's Mr Hudson says: "The investment market is continuing to witness a weight of money against a backdrop of limited supply, which is forcing major institutional funds to increasingly focus on smaller lot sizes.

"It is not unusual for these major buyers to bid on properties between #1 million and #2 million. This in turn is pushing prices up and hardening yields on quality product as well  as increasing demand for secondary, older, multi-let industrial estates and more modern property with short lease lengths or inferior covenant strengths.

"As a result, small investors are finding it increasingly difficult to compete and are being pushed out of their own domain."

According to Knight Frank, the changing marketplace has seen an increase in demand for deals around the #1 million mark with the firm's Birmingham-based investment team having negotiated three such deals this quarter.

Mr Hudson's list includes the sale of Mount Street Business Park, Nechells, on behalf of British Waterways, the purchase of a single-let unit at Coombs Wood Business Park, Halesowen, for Holmfield Investments, and the #1.26 million acquisition of Cornwall Road Industrial Estate, Smethwick, on behalf of London and Lothian Group - their first deal outside of the South-east.

"These three deals amply illustrate the current lack of supply and the situation whereby investors and agents alike are focusing on the smaller deals to keep the market moving," says Mr Hudson.

"This was displayed when Cornwall Road Industrial Estate came to the market, as many local investors were interested in securing the estate and our client, a South-east-based investor, was the successful purchaser.

"The reversionary estate will enable our client to take advantage of future rental growth and the potential break-up of the site.

"Moving forward through the remainder of this year and into 2005, this imbalance between demand and supply is set to continue.

"Institutional funds will continue to allocate more cash reserves to property as equities remain out of favour and outbid private investors as the year progresses.

"There will also continue to be little supply as funds hold on to existing properties which may have previously been allocated for disposal as there is very little stock for them to reinvest in.

"This is resulting in a stalling marketplace and will continue to create an ultra-competitive environment for product that is in the market."

According to LSH, the most significant spending group in the region last year was overseas investors, with #151 million targeted at the region - and it seems that the trend is likely to continue.

Syndicated investments arranged by Bank of Ireland Asset Management accounted for the two largest deals by overseas investors, buying 5 St Philips Place for #39 million and 2 Brindleyplace for #31 million, at net initial yields of 5.75 per cent in one case and 5.9 per cent in the other.

"With its proximity and links to the local community, Irish investors have always looked favourably on the West Midlands and will continue to do so," says Mr Pearson.

His optimism is underscored by examples such as one #20 million portfolio of investment property being disposed of by LSH. "There has been a remarkable amount of interest in these buildings," says Mr Pearson, adding that all of them have gone to best and final offers.

Nationally, the retail sector saw the greatest level of activity, with around #10.9 billion of investment or 39 per cent of all deals during the year. Retail warehousing was popular too, with around #3.6 billion of deals, but the most heavily traded sector was the shopping centres market, where almost #5 billion of property changed hands.

The largest retail transaction in the West Midlands was the Mail Partnership's purchase of the Gracechurch Centre, Sutton Coldfield, for #104 million.

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