CoStar Investment Review: Investment jumped sharply in Q2 2017 but the market is polarised

By Mark Stansfield - Thursday, August 03, 2017 15:00

Investment in UK commercial property rose sharply in Q2 2017, bucking the recent downward trend, according to CoStar’s latest investment report.

At £14.7bn, volumes jumped 34% Q-o-Q. They were also up 23% compared to Q2 2016, marking the first Y-o-Y rise for two years.

But peel back the curtains and a heavily polarised landscape is revealed. Trophy assets in London, warehouses, and alternatives are proving very popular with investors. Conversely, investment in retail, regional offices, and lower-value Central London trades was far more subdued. Average yields across the UK ticked upwards again as a consequence.

In London, big deals moved the dial. The number of £100m-plus trades jumped sharply, to 20, up from 13 in Q1 and just six in Q2 2016. Chinese and German investment reached record highs, as did foreign spending as a percentage of overall volumes. However, beyond the headline deals trading was relatively quiet. Just 44 office sales completed in Central London in Q2, well below the five-year quarterly average of 67, which suggests that the wider investment community is more cautious on London amid weakening fundamentals.

Outside of London, the picture was mixed. Despite signs of the UK institutions returning to the fray, regional office investment slumped to a four-year low of £1.2bn in Q2 2017. Office investment in the Big Six cities was around half its five-year quarterly average, while the South East also recorded weak volumes. One reason is a lack of willing sellers. Anecdotal evidence suggests that many investors—who are under little pressure to sell—are holding onto assets and focusing instead on driving up income.  

On a sector basis, industrial was the standout performer. Buoyed by positive supply/demand dynamics, investment jumped 48% Y-o-Y, to £2.1bn. Alternatives are also proving popular, particularly student accommodation and the burgeoning build-to-rent sector. Conversely, retail investment remains subdued, which is being reflected in falling pricing in this sector.

Nonetheless, Q2’s figures are very encouraging for the UK market, serving as a vote of confidence as the country enters a period of heightened political and economic uncertainty. It will be interesting to see if volumes can be sustained in the second half of the year. Early signs are positive: the £1.3bn sale of 20 Fenchurch Street closed in early Q3, as did the £600m Grosvenor House Hotel deal.

For more information and analysis on these themes, including a special feature on German investment in the UK (co-authored by CoStar News and Thomas Daily) and updates on our recently launched repeat-sale indices and occupier market overview, please log in to CoStar to access our revamped Q2 2017 UK Commercial Property Investment Review (access via Presentations & Webinars section).  If you are not yet a client, please email sales@costar.co.uk.

mstansfield@costar.co.uk

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