Investment activity remained lacklustre amid ongoing uncertainty over pricing in Q2, according to Lambert Smith Hampton’s latest UK Investment Transactions (UKIT) report.
£7.5bn of property assets changed hands in the quarter, down 10% on Q1’s already subdued outturn, and 41% below the five-year quarterly average. Notably, for the first time in over a decade, Q2 also brought a third successive quarter of sub £10bn volume. However, Q2 was more positive activity-wise, with the number of recorded transactions improving by 9% on Q1 and 36% below the five-year trend.
While none of the key sectors boasted above average volume in Q2, offices was the main drag on the overall picture. Investor concerns around structural change and ESG remediation costs saw office volume slump to £1.9bn, down 26% on Q1 and 53% below average. However, underlining investor focus on secure and / or best in class office assets, Q2 saw a number of offices change hands at notably keener yields. Key examples included CBRE IM’s £73m purchase of Halo, Bristol (NIY 5.61%) from Tesco Pension Fund; and a Singaporean investor’s £54m purchase of 215 Great Portland Street (NIY 3.89%) in London W1 from Amsprop Estates.
Retail volume also turned notably subdued in Q2 following a mini-revival over the past couple of years. Volume slumped to £778m, down 42% on Q1 and the weakest outturn since the height of the pandemic in Q2 2020. However, shops and shopping centres bore the brunt of retail’s poor showing with a dearth of activity in Q2, with retail warehousing continuing to attract robust investment demand. Retail warehousing was in fact the best traded sub-sector relative to trend in Q2, with volume of £528m only 3% below average and boosted by multiple purchases from Realty Income Corp worth a combined £270m.
Meanwhile, in the wake of a substantial pricing correction at the end 2022, industrial & logistics saw the strongest volume relative to trend of the core sectors in Q2. Total volume hit £1.9bn in the quarter, rebounding by 44% on Q1 and only 20% below the five-year quarterly average. That said, activity was discernibly thinner than previous quarters, with volume boosted by the return of sizeable portfolio deals and the largest overall deal in the quarter, namely Blackstone’s £489m acquisition of two distribution parks in Greater Manchester from Harbert and Canmoor.
At £2.6bn, the living arena was also key to Q2 volume, accounting for 33% of the total and the highest share of the overall market since Q1 2020. Eight of Q2’s 14 £100m plus deals involved living assets, with volume dominated by build to rent and PBSA forward funding commitments. The largest deal in each sector respectively comprised Starlight Investment’s £225m commitment for three BtR schemes; and Greystar’s £300m commitment to develop a 770-unit PBSA scheme at Wembley Park, London.
Despite the economic headwinds, overseas buyers continued to dominate the larger end of the market, with inflows of £4.0bn in Q2 making up 56% of total volume. Of the key investor categories, overseas investors were the only net buyer of UK property in Q2 to the tune of £2.1bn, almost doubling from Q1.
While all the main domestic buyer types saw below-trend purchasing in Q2, private propcos were closest to par, with total volume of £1.6bn only 13% below average. At £1.2bn, institutional purchasing in Q2 increased by 30% from the fifteen-year low of the previous quarter but was still 45% below average. Volume was boosted by Legal & General’s two major BtR funding deals, comprising The Loft Lines, Belfast (£150m) and Whitehall Riverside, Leeds (£140m).
Following three successive quarters of outward movement, the All Property average transaction yield moved in by 19bps in Q2 to stand at 5.73%. This reflects a combination of both improving price stability and a flight to quality in some parts of the market, particularly offices, where the average transaction yield moved in by 44bps to 5.74%. The recent 50bp hike in interest rates came too soon to be reflected in average transaction yields, although sentiment points to a 25bp softening in notional prime yields across all of the key office segments at the end of the quarter.
Ezra Nahome, CEO of Lambert Smith Hampton, commented:
“While Q2’s subdued volume was expected, the fresh knock to sentiment from the latest bout of interest rate hikes will continue to weigh heavily on the market. Pressure on lenders is starting to build and will challenge the banks to hold their nerve or come to the market with consensual sales. Meanwhile, there is a considerable amount of capital patiently waiting on the sidelines seeking out opportunities. After a quieter than usual summer, I expect this to translate into a significant uptick in volume into Q4.
“The latest rate hikes will impact more selectively on pricing compared with the fallout we saw last Autumn. Sectors benefitting from rental growth, such as build to rent and industrial, will remain resilient, while bond like investments and more exposed parts of the market, in particular secondary offices, may see further correction.”
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