Research - 30/10/2018

UKIT Q3 2018: No Sign of Brexit Fright as Q3 Volume Hits Three Year High

A flurry of major deals propelled UK investment volume to £17.0bn in Q3, the strongest quarter since Q2 2015 and 14% above the quarterly average, according to our latest UKIT report.

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A flurry of major deals propelled UK investment volume to £17.0bn in Q3, the strongest quarter since Q2 2015 and 14% above the quarterly average, according to Lambert Smith Hampton’s latest UK Investment Transactions (UKIT) report.

Two £1bn plus deals were a key factor in Q3’s impressive volume, comprising Telereal Trillium and Blackstone’s £1.46bn purchase of Network Rail’s arches portfolio and Korean National Pension Scheme’s £1.16bn acquisition of Goldman Sachs’ new headquarters Plumtree Court, London EC4 for (4.10% NIY).

r of recorded deals was a record for a third quarter period and was 28% above the same quarter in 2017.numbeQ3 was also remarkably busy; the

Overseas investment was a key driver of Q3’s strong volume. At £8.6bn, overseas volume was up 38% on the previous quarter and 20% above the five-year quarterly average. In keeping with trend, almost half of overseas spending involved Central London offices.

Meanwhile, at £2.6bn, institutional investment was relatively subdued in Q3, albeit they were net buyers to the tune of £402m. This was underpinned by PRS, with the two largest deals being Legal & General’s purchases Macbean, Woolwich (£300m) and West Tower, Manchester (£110m). Indeed, Q3 saw record volume in PRS, with volume of £1.8bn including Oxford Properties’ £600m acquisition of a 39% stake in the Get Living portfolio. 

Despite impressive volume, market sentiment remains highly polarised between sectors. Strong investor appetite for industrial assets appears unabated, with Q3 volume of £2.2bn the third strongest quarter on record, underpinned by a flurry of portfolio deals. 

Meanwhile, however, heightened aversion towards retail investments is clearly reflected in volume. Only £1.5bn worth of retail assets changed hands in Q3, the lowest quarterly volume in over six years. Of the sub-sectors, shopping centre volume was its lowest on record, with less than £40m transacting across four deals.

The All Property average transaction yield moved out by 22bps in the quarter to stand at 5.66%, effectively reversing the downward movement seen in Q2 and moving back into line with the level seen over much of the past two years. The average office yield moved out by 25 bps to 5.29%, its highest level since Q1 2015, suggestive of improving appetite to acquire secondary stock for asset management plays.

Ezra Nahome, CEO of Lambert Smith Hampton, commented:

“Both Q3’s volume and sheer number of deals is clear testament to the ongoing confidence in the core fundamentals of UK commercial property, in spite of the ongoing political deadlock over the Brexit negotiations.

“UK property evidently remains firmly in favour from overseas buyers. The risks around Brexit are being viewed in a wider global context, with the UK offering relative value alongside its enduring reputation as a safe-haven for international capital.

“The signs so-far indicate that Q4 will deliver another strong quarter for volumes, taking the UK total for 2018 as a whole to circa £60bn, exactly in line with our forecast made at the beginning of the year.

“However, we cannot be complacent around Brexit. Sentiment in the early part of 2019 will depend heavily on the success or otherwise of the negotiations, particularly among the UK funds. That said, with limited potential for distress in this cycle, Brexit difficulties are more likely to result in inertia than material price corrections.”

For the full report please download here.

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