Second quarter UK commercial real estate investment levels were "respectable" but underpinned by a clutch of mega-deals alongside a drop in overall activity.
Lambert Smith Hampton’s latest UK investment transactions report finds that heightened geopolitical uncertainty and shifting financial conditions are keeping a lid on activity.
LSH says the second quarter total volume of £10 billion is a "resilient" performance that is down 7% on the first quarter and 17% below the five-year quarterly average. The impact on sentiment due to conflict in the Middle East was more strongly reflected in activity, LSH says, with the number of transactions down 20% on the first quarter.
Deals at the larger end of the market have been crucial. There were 25 £100 million-plus transactions in the second quarter, which accounted for 62% of total volume. Four transactions were bigger than of £500 million, the largest of all being Morgan Stanley and Ridgeback’s £1 billion purchase of the Metra Living PRS portfolio.
The living sector again commanded the leading share of the quarter's investment, with the £4 billion traded exactly in line with the five-year quarterly average and the most resilient against trend, LSH reports. This included a record £2 billion of volume for build to rent or private rented sector deals, 39% above average and boosted by the Metra Living sale.
Of the commercial sectors, retail stood up best against trend, with sales of £1.7 billion at 3% below the average, LSH said. A surge in retail warehouse investment was key, with £1 billion of transactions underpinned by Frasers Group’s purchase of a pair of designer outlet centres for circa £400 million, as revealed by CoStar News.
Offices and industrial were harder hit, though LSH says a lack of "suitable stock" was a key factor. While office volume of £2.6 billion was only 15% below average, the resilient-looking central London figure of £1.9 billion was skewed by Barclays’ £750 million acquisition of One Churchill Place, E14. LSH said the "exceptional" for-its-size transaction reflects a growing trend for office occupiers to exploit current pricing and take ownership of their workspace, typically in advance of refurbishment plans.
Buyer location and typ
At £5.2 billion, overseas buyers accounted for over half of the second quarter’s total investment. But a flurry of large disposals left overseas net purchasing at £648 million, the second lowest on record. North American purchasing rose to £2.7 billion, while European investment of £1.7 billion remained 50% above average.
Domestic investment remained subdued during the second quarter. Despite growing demand from the pooled local authority funds, institutional purchasing of £680 million was the second lowest since the great financial crisis and included only one large-scale deal, Cheyne Capital’s £130 million purchase of the Borough Yards mixed-use development in SE1.
Quoted property company purchasing of £690 million was 37% below average and fed through to a sixth successive quarter of net selling, at £207 million. This was also dominated by Frasers Group’s acquisition of two designer outlet centres, which alone made up 60% of the total.
Pricing-wise, a number of transactions in the second quarter provided evidence of a degree of price softening for prime assets, with notional prime yields softening by 25 basis points for London BTR and regional offices, LSH reported. But notional yields held steady for the vast majority of sectors in the second quarter with the cross-sector average prime yield moving out by a marginal 3 basis points to 5.66%, LSH said.
Ezra Nahome, the chief executive of Lambert Smith Hampton, said in a statement: “The UK property market continues to show resilience despite ongoing political and geopolitical uncertainty. While Q2 volumes held up, market activity understandably softened given wider global events.
“Recent attention has focused on what a Burnham-led government could mean for the economy and property market. Early signals around infrastructure investment and devolution are encouraging, although questions remain over fiscal policy.
“Echoing England’s ill-fated exit from the World Cup, the past year has highlighted an important lesson for investors: success comes not from sitting back and waiting for conditions to improve, but from having the confidence to act when opportunities arise.
“Those opportunities remain evident across UK real estate. Supply constraints continue to support rental growth, while the focus on income reinforces the appeal of active asset management strategies. Market fundamentals remain sound and UK real estate continues to offer attractive long-term opportunities for disciplined, proactive investors."