CoStar Q3 Investment Bulletin: UK CRE investment falls
Investment into UK commercial property fell to a four-year low in Q3 2016 as investors continued to rein in spending in the first quarterly period since the EU Referendum vote, according to CoStar’s latest data.
The volume of trading in the third quarter (£8.7bn) represented a 27% drop from Q2’s £12bn and a 42% fall from the same quarter a year ago. The drop was perhaps particularly acute because of Brexit, but it should be noted that volumes have been declining for several quarters now.
London offices were especially affected in Q3. Investment into Central London offices fell 64% Y-o-Y as a number of potential sales were withdrawn, while average yields ticked upwards (albeit from very low levels).
Large deals were particularly scarce: Wells Fargo’s £300m acquisition of 33 Central in the City was one of only four deals above £100m, down from 15 a year earlier. The market was supported by new overseas entrants like China Minsheng seeking to take advantage of the weak pound. Overseas capital was behind a record 84% of total spend in Central London in Q3.
In a quarter of weak activity, one trend stood out above all others: the emergence of local authorities as key buyers of commercial property. Motivated by central government cuts, low borrowing rates and, in some cases, a desire to actively improve local areas, local authorities spent close to £800m in Q3 2016 – more than in the previous three years combined. Spelthorne Council’s £350m-plus acquisition of the BP Business Centre in Sunbury was the most notable such trade.
On a sector-by-sector basis, offices and shopping centres were the big under-performers, with investment in the latter falling to their lowest quarterly level since 2009. Industrial investment also fell, but many commentators have pinpointed logistics as the sector best placed to withstand Brexit uncertainty going forwards, with the shift from physical to online retailing expected to continue regardless of wider economic conditions, fuelling demand for sheds in the right locations. Student accommodation investment held up strongly in Q3, and such defensive assets are likely to prove popular in the near term as investors de-risk.
Despite the continued fall in investment last quarter and the uncertainty surrounding Brexit there is still much in favour of commercial property. Vacancy rates are at historically low levels in many markets across the UK, and property still offers attractive yield spreads over other asset classes such as gilts. Anecdotal evidence suggests there is plenty of appetite to invest once nervousness about values is overcome.
For more information and analysis on these themes, including an investment breakdown by sector and region, a spotlight on pricing and further post-referendum analysis, CoStar’s Q3 2016 UK Commercial Property Investment Review will soon be available. If you are not yet a client, please email firstname.lastname@example.org.