Q3 saw a tangible improvement in volumes from Q2’s lockdown low, led by activity in the regions, according to our latest UK Investment Transactions (UKIT) report.
Total UK investment volume reached £6.5bn in Q3, a rebound of 48% on Q2’s near record low but nonetheless 50% below the five-year quarterly trend level. Positively, activity accelerated towards the end of the quarter, as a degree of normality began to return to the market after the lockdown.
Following an especially quiet month in August, September’s volume of £2.7bn was the strongest monthly outturn since prior to the pandemic in early 2020, while the number of recorded deals in the month was also the highest since February 2020.
Q3’s largest transaction was Link REIT’s (Hong Kong) £380m purchase of 25 Cabot Square, London (Morgan Stanley HQ) from Hines Global REIT (NIY 4.5%). This deal, and others, such as Sun Venture’s £174m purchase of 1 New Oxford Street (NIY 4.2%) and Tristan Capital Partners’ £120m purchase of Reading International Business Park (NIY 6.1%), saw offices take the highest share of Q3 volume by sector, at 31% of the total.
While London was home to several of the quarter’s big ticket deals, activity in the capital remained subdued, and largely reflected another relatively baron quarter for Central London offices. In sharp contrast, activity elsewhere in the UK ran much closer to pre-COVID trends, with single asset volume across the regions collectively totalling £3.3bn, only 28% below the five year quarterly average.
The contrasting fortune between London and the UK regions was partly down to the ongoing strength of appetite for industrial. This was the strongest performing sector against trend in Q3, with volume of £1.6bn only 19% below the five-year quarterly average. Tellingly, given its pivotal role in keeping consumers supplied throughout lockdown, industrial volume was dominated by distribution warehouses, where volume of £945m was 13% above trend.
Much of the living arena has been deeply affected by the pandemic, not least the hotels sector. Total volume in living was only £1.4bn in Q3, 59% below average and a huge fall from the record £7.1bn recorded in Q1 2020. Notably, however, investment in Build to Rent (BtR) remained strong in Q3 and accounted for half of volume into the living sectors, the largest deal being Get Living’s £252m forward funding of a 649 unit mixed use scheme in Lewisham, London.
Reflecting entrenched structural challenges, at £879m retail volume was again extremely subdued in Q3, being under £1bn for a fourth successive quarter. Of the retail sub-sectors, retail warehouses was strongest against trend, with volume of £322m boosted by M7’s £157m (NIY 7.5%) purchase of a 6-asset portfolio from Nuveen.
Volume across all of the key buyer types remained significantly below trend in Q3. However, the pick-up in buying from the low of Q2 was particularly notable for overseas buyers, where volume doubled to £2.9bn; and institutions, where volume rebounded by 46% to £1.4bn despite many of the funds still being gated. Q3’s largest institutional purchase was Columbia Threadneedle’s £370m purchase of the MAGIAL portfolio from the Manchester Airport Group.
The sharp inward movement in the average transaction yield in Q2 was largely reversed in Q3. The All Property average transaction yield moved out by 46bps in Q3 to stand at 5.71%. The outward movement was driven by activity in the retail sector, where the average transaction yield moved out by a considerable 159bps to 6.60% and indicative of opportunity-led buying in the sector.
Ezra Nahome, CEO, commented:
“Encouraging as it was, the pick-up in investment naturally reflected the reopening of the economy and a partial return to a more normal way of life over the summer. But the asymmetry of Q3’s rebound, between sectors and UK regions, speaks volumes for the ongoing challenges stemming from the pandemic.
“The pandemic has pulled the rug from underneath the central London Office market. The sharp increase in tenant space and evidence of unsold stock on the market has suddenly brought into question the global allure of the sector. The pandemic is prompting a shift in investor perceptions of ‘safe havens’, putting ever more focus on long income, secure assets over and above location.
“Increasing concerns over a second wave of infections and the newly announced system of restrictions will temper our initial expectations for a strong final quarter. That said, a cocktail of a global weight of money and increasing levels of distress is expected to stimulate significant activity in the market, if not in Q4, then certainly in Q1 2021.
“We are in choppy waters now, but for many investors this is a tremendous opportunity to hit the reset button and guide the transformation of the built environment firmly into 21st century. Current reforms to the UK planning system will have a key role to play, enabling the repurposing of retail and office assets for residential and other uses.”
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