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Viewpoint - 24/04/2012

UKIT Q1 2012: Investors continue to focus on London

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Investment in London versus the regions became even more polarised in quarter one 2012 – according to our quarterly research, UK Investment Transactions (UKIT) Q1 2012.

Activity in the capital accounted for 61% of the quarterly total, or £4.15bn of the £6.85bn transacted.

Activity in London almost double 10 year average in Q1 2012

Over the last 10 years activity in the capital has accounted for 35% of all the money invested in the UK. This proportion has increased in the last five years, but activity in the capital was almost double the 10 year average in Q1 2012 as the economic outlook remained subdued, leading investors to remain cautious when assessing secondary property in the regions.

Best performing asset classes were alternative and portfolios

Average transactional yields were being pushed down to 5.65% by some large deals; over £800m worth of student accommodation, hotels, gyms and care-homes were traded in Q1 2012. While the largest portfolio deal was a joint venture between Tesco and Trinity College Cambridge who acquired a portfolio of Tesco stores for £450m at a yield of 4.9%.

Ezra Nahome, our CEO, said: “Investors are fundamentally attracted to assets which are very secure and let on long leases and these assets are not location sensitive. We see this trend continuing and if anything yields getting stronger as investors appetite for risk diminishes. However, Central London offices continue to be the most desirable asset class from a pure property perspective - accounting nearly 40% of the investment volume in quarter one.”

Overseas buyers remain the driving force behind the market

Overseas investors were responsible for 42% of all take-up in Q1; this equates to £2.9bn. Overseas investors are almost solely focused on assets in London. Consequently they accounted for 63% of all money invested in London this quarter – but only 10% of the regional investment volume.

Summarising the performance of yields in Q1 2012:

• All property transactional yields moved out by 16 basis points to 6.98%, the highest it has been since Q4 2009

• Overall office yields moved out by 13 basis points

• Central London office yields moved in slightly as pricing remained on a par with Q4 2011

• Retail yields moved out to the highest recorded level since Q3 2009

• Industrial yields moved out by 65 basis points to 8.11%

• Alternative asset classes and portfolios were pushed down to 5.65%

When will investors return to the regions in any number?

Pricing in the regions looks attractive, but realistically investors are only going to return when there is confidence in the occupier market and when debt is more readily available. Ultimately this will be when the UK’s economy is back on track, which according to economic forecasts will not be until 2013. When investors do decide to return to the regional markets stock selection, pricing and local market knowledge will be key to performance.

Concluding, Ezra said: “Ultimately market activity in 2012 has picked up where 2011 left off. We expect the market to continue in this vein for the remaining three quarters as the emphasis on prime property with a secure income remains paramount. This, combined with the lack of available funding, will hold back activity and inevitably allows equity buyers to continue to dominate the market.”

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