commercial property lambert smith hampton

Research - 27/04/2017

Major deals flatter investment volume in Q1 2017

Investment in UK commercial property reached a respectable £12.2bn in Q1 2017, down 6% on both the previous quarter and the five-year quarterly average.

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Lambert Smith Hampton’s latest quarterly UK Investment Transactions (UKIT) report reveals that volume was fuelled by major transactions. Q1 saw 30 deals in excess of £100m, compared with five-year quarterly average of 20. The capital was the clear beneficiary, with Greater London taking 50% of total UK volume.

Average prices have remained remarkably stable since summer 2016. The All Property average transaction yield in Q1 was 5.66%, standing only 2bps above the level from Q2 2016.   

Overseas demand for UK property continues unabated, with foreign buyers accounting for half of Q1 turnover. Far Eastern investors have emerged as the dominant source of overseas demand, purchasing £2.7bn in Q1, the highest since Q4 2013 and boosted by CC Land’s £1.15bn purchase of the Leadenhall Building (The Cheesegrater) in the City of London.

Following three quarters of substantial net selling, UK institutions were only marginal net sellers in Q1, at £0.4bn. This largely reflected limited selling activity as opposed to a more concerted return to buying, with the lowest volume of sales since Q2 2014. 

Ezra Nahome, CEO of Lambert Smith Hampton, said “On face value, Q1’s volume was more than respectable given the uncertain environment the market is operating in. However, it was flattered by a flurry of major deals which masked what was actually a relatively quiet quarter. 

The issue boils down to stock. While there is no shortage of demand for high quality assets, not least from overseas investors, activity has been dictated by a lack of stock on the market. Meanwhile, a more sceptical view on rental growth has dampened appetite higher up the risk curve.

Investors crave certainty, and the fact that the financial markets reacted positively to the Prime Minister’s announcement, just weeks after Article 50 was triggered, reflects improved confidence both in the journey toward the EU exit door and the eventual terms of Brexit. 

Evidence from past elections tells us that investment activity can enter a lull in the lead up before bouncing back afterwards. On this occasion, the election outcome is widely predicted, and I expect it to have a benign effect on the market during the second quarter.

With so much of a focus on political developments, it is easy to overlook that the UK economy has quietly continued to demonstrate resilience. Moreover, should the path towards Brexit be less troublesome for the economy than many fear, those investors who are willing to take on risk may stand to benefit most of all”.

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