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* U.S. funds step up presence in London; sovereign wealthactive
* UK insurers, pension funds seek opportunities in regions
* Manchester, Leeds, Glasgow amongst favoured destinations
* Many UK groups go directly through private deals, avoidauction
By Esha Vaish and Simon Jessop
LONDON, Jan 11 (Reuters) - Tough foreign competition in theLondon commercial property market is forcing local investors toinvest in regional cities to tap rising rents there, with manymaking purchases privately to avoid auctions or even buildingoffice blocks from scratch.
Commercial and residential property in London has become apopular safe haven for investors from places such as Russia,China and southern Europe as a result of the financial crisis,and office prices have bounced back strongly from the lows.
From a $4 billion battle for control of the Canary Wharffinancial district to the creation of the capital's tallestbuilding, The Shard, thanks to oil money from the Gulf, many ofLondon's landmarks have had a helpful overseas financing hand.
Last year, more than 55 billion pounds ($83.5 billion) wasinvested in commercial property across the country, much of itby pension funds, insurers and sovereign wealth funds lookingfor steady, long-term income.
But local investors are increasingly seeing advantageelsewhere.
"We do need to be savvy as to where we invest, and there aresome markets in the UK, particularly prime core London, which wesee as fully priced," said Chris Perkins, who heads up the teammanaging business and industrial property at M&G Real Estate, aunit of insurer Prudential.
Political uncertainty about who will win in a British May 7election could crimp demand for commercial property slightly inthe early part of the year, but any slowdown in overseasinterest would be temporary, analysts said.
With London the principal target for foreign capital,British investors are seeking rising rents in cities such asGlasgow, Leeds and Manchester as an economic recovery takes holdacross the country.
PATCHY PIPELINE, PREMIUM SHORTAGE
In regional centres, a patchy property development pipelineand a shortage of premium property are creating opportunitiesfor home-grown investors.
British institutions increased exposure to the regionaloffice market to 46 percent by September 2014, from 33 percent ayear ago, research from realtor Savills showed, whileadding in funds from property firms, occupiers and privateinvestors, their share of regional commercial property was 60percent.
Among the most active of the British investors, M&G signedthe largest regional deal of 2014, spending around 320 millionpounds ($499 million) for 500,000 square feet of office space inManchester. Of the 3 billion pounds it spent buying property in2014, 60 percent was spent outside London.
The group made total returns of around 20 percent in 2014and should achieve double-digit returns this year, M&G's Perkinssaid. That stacks up well against more traditional investments,such as the blue-chip FTSE 100, down 2.7 percent in2014.
For those wanting to invest in regional cities for capitalgrowth and lucrative rentals, there are several routes. The mostcommon is to invest in a real estate investment trust or amutual fund, although those with a medium-term view and theright skills could buy an existing building or fund a new-build.
Although the value of offices outside London is lower, therehas been a jump in rental demand for offices in the country'smajor regional markets: from Bristol and Birmingham to Glasgowand Edinburgh.
While prime office locations in London's crowded City financial district fetched rents of about 80 pounds per squarefoot by mid-2014, Birmingham offices got roughly 30 pounds andManchester 32 pounds, Savills data showed.
STEALING A MARCH TO THE REGIONS
Yields are also higher in the regions: while prime officespace in the City returned 4.25 percent in the second quarter of2014, Birmingham returned 5.25 percent and Manchester 5 percent.
For domestic investors looking to steal a march on rivals,many are going directly to local governments and companies thatmay need to sell off assets, as well as retailers and othersopen to leasing back their property to free up cash.
"We spend a lot of time seeking off-market transactionswhere we don't have to be in competitive bidding," said BillHughes, head of property at Legal & General InvestmentManagement. "That is where you get the best value."
After improving a building - with a view to holding it foran average of seven to 10 years - the investment arm of insurerLegal & General can sell it on as a performing asset toanother long-term holder, such as a pension scheme or sovereignwealth fund.
The latter have been hesitant to invest directly in suchassets, preferring more assured returns from higher-quality'Grade-A' London properties which are easier to sell on.
The limited availability of Grade-A property assets outsideLondon - down nearly 40 percent over the last four years,analyst Andy Brunner of Morningstar said - means those who takethe risk of building the properties from scratch could cash in.
While the lack of income from an unbuilt property can putsome off, an improvement in the underlying economy has leftothers more confident about taking on the risk, said MichaelHaddock, senior research director at CBRE.
Although foreign investors are likely to follow the pathforged by local rivals, the incumbents should enjoy theiradvantage for some time yet, said Haddock.
"In theory almost any investor might be interested insmaller markets. However, because it is harder to place largeamounts in smaller cities quickly, some of the largerinternational investors who have large amounts to invest andlimited management capacity might find them impractical." (Graphics by Vincent Flasseur; editing by Robin Paxton andPeter Millership)
