CoStar Investment Review: Volumes fell in Q1 2017 but the picture is increasingly complicated

By Mark Stansfield - Thursday, May 04, 2017 15:00

Investment in UK commercial property continued to decline in Q1 2017, according to CoStar’s latest investment data.

At £10.9bn, volumes were down by 11% compared to Q1 2016 and 22% below the five-year quarterly average. Although investment over the last four quarters (£47.5bn) remained ahead of the 10-year annual average, it marked a 25% drop on the previous four quarters.

But behind the headline figures a more nuanced picture is emerging. Deal frequency remains relatively buoyant: CoStar recorded more than 1,100 transactions in Q1 2017, up 20% Y-o-Y. Anecdotal evidence may point towards investors getting more selective and there being a lack of willing sellers, but the data suggests plenty of activity in the market. Demand for property is also being reflected in pricing, with only marginal rises in average yields since the referendum.

London offices remain a target for global capital, particularly from China and Hong Kong. But investors are focusing on safe, core assets—there is little appetite for risk. The number of Central London office deals (45) was well below average, and volumes were also down (albeit a couple of large trades - most notably the £1.15bn sale of the Leadenhall Building to CC Land, in a deal first revealed by CoStar News here  - exchanged but did not complete during the quarter). This is perhaps unsurprising given concerns over fundamentals and tight pricing. Indeed, as the report shows, Central London office rental growth is now trailing behind the rest of the UK for the first time in seven years.

Investors were more active in the regions, where investment rose 15% Y-o-Y. This was despite local authorities paring back spending following their huge spree in the second half of 2016. England’s western regions and Scotland proved popular, with the Build to Rent residential sector accounting for an ever greater share of volumes.

Of the three main property types, industrial remains the darling of investors, buoyed by positive supply/demand dynamics and viewed by many as the sector best placed to cope with any Brexit-inspired headwinds. In contrast, investment in supermarkets slumped to its lowest level in over 10 years.

So as yet another election approaches, the commercial property investment market appears finely balanced. Outperformance in some sectors and regions is helping to offset weaker performance in others, with underlying occupier market fundamentals increasingly key as investors look to income. Property will likely remain on investors’ radar given its relative value, but riskier assets could lose their appeal in light of continued uncertainty.

For more information and analysis on these themes, including an update on our recently launched repeat sale indices (which measures price movement by looking at instances where the same property has sold twice), a special feature on the national occupier market, and an Article 50 Sentiment Survey, please log in to CoStar to access our Q1 2017 UK Commercial Property Investment Review.  If you are not yet a client, please email sales@costar.co.uk.

mstansfield@costar.co.uk

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