Respectable Q2 volume was underpinned by a clutch of mega-deals, while a drop in activity reflected elevated geopolitical uncertainty and shifting financial conditions, according to Lambert Smith Hampton’s latest UKIT (UK Investment Transactions) report.

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Q2’s total volume of £10.0bn appeared resilient, down only 7% on Q1 and 17% below the five-year quarterly average. However, the impact on sentiment due to conflict in the Middle East was more strongly reflected in activity, with the number of transactions down 20% on Q1. 

Ongoing momentum at the larger end of the market was crucial to Q2’s respectable outturn. Q2 saw 25 £100m-plus transactions, which together accounted for 62% of total volume. Four transactions were in excess of £500m, the largest of all being Morgan Stanley and Ridgeback’s £1.0bn purchase of the Metra Living PRS portfolio.

Living again commanded the leading share of Q2 investment, with volume of £4.0bn exactly in line with the five-year quarterly average and the most resilient against trend. This included a record £2.0bn of volume for BTR/PRS, 39% above average and boosted by the above Metra Living sale.

Of the commercial sectors, retail was the most resilient against trend, with volume of £1.7bn only 3% below average. A surge in retail warehouse investment was key, with volume of £1.0bn underpinned by Frasers Group’s purchase of a pair of designer outlet centres for c.£400m.

Offices and industrial were more clearly off-colour in Q2, albeit a lack of suitable stock was a key factor. While office volume of £2.6bn was only 15% below average, resilient-looking Central London volume of £1.9bn was skewed by Barclays’ £750m acquisition of One Churchill Place, E14. While exceptional for its size, the transaction reflects a growing trend for office occupiers to exploit current pricing and take ownership of their workspace, typically in advance of refurbishment plans.

At £5.2bn, overseas inflows accounted for over half of Q2’s total investment. That said, a flurry of large disposals left overseas net purchasing at £648m, the second lowest on record. North American purchasing rose to £2.7bn, while European investment of £1.7bn remained 50% above average.

Domestic investment remained subdued during Q2. Despite growing demand from the pooled local authority pension funds, institutional purchasing of £680m was the second lowest since the GFC and included only one large-scale deal, Cheyne Capital’s £130m purchase of the Borough Yards mixed-use development, SE1. 

Meanwhile, quoted propco purchasing of £690m was 37% below average and fed through to a sixth successive quarter of net selling, at £207m. This purchasing was also dominated by Frasers Group’s acquisition of two designer outlet centres, which alone made up 60% of the total.

With regard to pricing, a number of transactions in Q2 provided evidence of a degree of price softening for prime assets, with notional prime yields softening by 25bps for London BTR and regional offices. That said, notional yields held steady for the vast majority of sectors in Q2, hence, the cross-sector average prime yield moved out by a marginal 3bps to 5.66%.

Ezra Nahome, CEO Lambert Smith Hampton, commented;

“The UK property market continues to show resilience despite ongoing political and geopolitical uncertainty. While Q2 volumes held up, market activity understandably softened given wider global events.

“Recent attention has focused on what a Burnham-led government could mean for the economy and property market. Early signals around infrastructure investment and devolution are encouraging, although questions remain over fiscal policy.

“Echoing England’s ill-fated exit from the World Cup, the past year has highlighted an important lesson for investors: success comes not from sitting back and waiting for conditions to improve, but from having the confidence to act when opportunities arise.

“Those opportunities remain evident across UK real estate. Supply constraints continue to support rental growth, while the focus on income reinforces the appeal of active asset management strategies. Market fundamentals remain sound and UK real estate continues to offer attractive long-term opportunities for disciplined, proactive investors."