National Investment Market Overview
Despite continued challenges since our last update, there have been pockets of optimism in the market. MIPIM saw investors flock back to the south of France making it clear there is investor demand. A handful of deals has suggested yield compression in both the retail warehousing and industrial sectors.
However, the continued uncertainty revolving around rising inflation, further interest rates rises and the banking scare following the collapse of SVB and Credit Suisse, have continued to pour cold water on the idea of a resurgence in market sentiment in H1 and subsequently transaction volumes remain significantly below last year.
The same challenges exist: pricing expectations remain dislocated, rising finance costs are pushing potentials buyers out of the market, and investors remain focused on limiting risk through investing in quality over quantity.
As we look past Easter and into the second half of the year, the market waits with bated breath to see who and when will be first to move. We are witnessing a period of constrained supply, forcing predominantly institutional cash driven investors to compete for the best ‘core assets’ and therefore price inflation. However, relatively low prices and a reluctance to expose more challenging assets to the market seems to be holding potential vendors back. Whilst difficult to look beyond the current economic / geopolitical challenges, what is clear from every conversation we are having with investors is there is capital awaiting deployment, frustrated at the limited opportunities currently available. We envisage a flurry of activity will take place in the second half of the year as capital realises it is time to stop ‘waiting’ and time to start ‘doing’.
Supermarkets Overview
It has been an interesting time for supermarket investments in Q1 2023, and whilst the sector continues to struggle with a lack of stock, liquidity has improved and we have observed a number of investors coming back into the market and successful transactions taking place.
Q1 saw PIMCO backing the Morrison’s covenant by acquiring four long let assets as part of a circa £115M portfolio from M&G, a further indication of their commitment to the covenant following a purchase of a chunk of Morrisons’ debt last year. They were not alone in investing into Morrisons, we understand a number of sale and leasebacks were also concluded including properties in Plymouth and Welwyn Garden City, purchased by Fiera Real Estate and Abrdn respectively.
Industrial Market Overview
Industrial’s strong performance over the last few years has meant that the disruption caused by September’s mini-budget and rising interest rates was more pronounced than other sectors. Improving clarity over interest rates and the economy is now leading to a growing sense that the pricing correction has completed, certainly with regard to prime assets.
There have been some notable transactions completed over the last 6 weeks suggesting that prime industrial yields for south east multi-lets have in fact moved in. Strong rental growth is still being registered in some key regional markets outside the South East, reflecting the continued occupier demand in this sector nationally
Retail Market Overview
The economic headwinds have meant a slow start to 2023 for the UK’s retail sector transactional market. Investment deal volumes are down in comparison to the same period a year ago although they are better than Q4 2022. This reflects confidence returning to the market due to a pricing correction exercise in Q4 2022, but ongoing difficulty and cost in obtaining debt continues to depress the market and maintains a gap between buyer and seller pricing expectations.
Office Market Overview
Despite challenges remaining ever present in the office market, a flurry of deals have gone under offer in Q1 where vendor and purchaser pricing expectations have married. We have also seen a larger than anticipated number of deals enter the market in the last two months, which provides confidence that we are moving in the right direction as the market begins to stabilise.
The emphasis from both occupiers and investors remains on high quality accommodation providing rounded ESG credentials.
Retail Warehouse Market Overview
Confidence in the sector has returned following a fall in transactional volumes. There is currently limited supply in stock formally coming to the market. Newly completed transactions have demonstrated that yields have moved in from Q4-22/beginning of Q1-23. A key example of this was Purley Cross Retail Park, Croydon which was U/O at 5.50%+ NIY prior to Christmas but ended up completing in March for 5.35% NIY.