National Investment Market
With all the political uncertainty caused by Brexit, Q4 2018 was always going to be a testing quarter for the UK Property Market as well as the economy in general.
The FTSE All –share retreated 10.2% over the
period falling sharply in line with global equities. It was one of the worst quarters for global equities in many years as fears over the outlook of the world economy came to a head. Several senior and junior ministers resigned in protest at the Withdrawal Agreement which raised questions over the stability of the UK Government, and the real estate market suffered accordingly.
2018 volumes for the entire UK Market
were as follows:-
£56.75Bn down 9.8% on the same period. London accounted for £20.4Bn
£30.29Bn down 15.3% on same period 2017
£14.88Bn down 7.9% on same period 2017
As we near the end of January 2019, we believe that deal volumes will continue to drop this year as a “No Deal” Brexit result gets ever closer. We have already experienced some of the larger funds considering portfolio sales in response to possible cash redemptions later this year which will lead to opportunities for cash rich purchasers.
We have already experienced some of the larger funds considering portfolio sales in response to possible cash redemptions later this year
Strong market dynamics sustained investor appetite resulting in a relatively successful Q4 for the industrial sector with over £1.23bn transacted over 100 deals. Although this reflects a significant reduction in comparison to Q4 2017, it is unquestionably a result of limited supply rather than any decline in investor demand.
Prime logistics yields remained in the region of 4.0 - 4.5%. Yields remain dependant on rental profile and covenant strength; however, given the limited supply of available prime warehouse accommodation investors have taken a more positive view on shorter unexpired terms. Prime multi-let yields remain at c. 4.0% and continue to feature prominently on many UK fund wish lists as a result of rental growth forecasts and the emergence of last mile delivery.
Notable industrial transactions during Q4 include; a £257.5m unnamed portfolio of 12 logistics units reflecting a NIY of 5.39%, Kings Norton Industrial Estate which sold for £134m reflecting 4.03% and the Bosch unit on Midlands Logistic Park which sold for £89.3m reflecting 5.2%. Allsop advised on the acquisition of the Ned Portfolio (£41.42m) and the Cedar Portfolio (£40m) amongst other notable industrial transactions.
Despite the continued economic uncertainty impacting many other property sectors during Q4 the industrial sector remained buoyant. With new entrants to the market from both UK and overseas we anticipate the sector will continue to thrive albeit restrained by a lack of supply.
High Street Retail
The retail High Street investment market remained subdued in Q4 2018 with the number of transactions significantly down on the same period in 2017.
The depth of interest for High Street investments has thinned across the sector however sub 5% yields are still being achieved in prime High Streets with good investment fundamentals. At the end of Q4 Debenhams in Clapham Junction transacted and with competitive bidding achieved £48m reflecting 3.6% NIY. This yield was driven by the potential alternative uses that the building offers.
Secondary and tertiary retail investments are proving less resilient with yields moving further out, increasing the gulf been prime and secondary yields. Investor confidence in the sector is low, this is continuing to be amplified with the news of more retailers suffering reduced in store sales over the Christmas period.
The year ended with HMV announcing that they are likely to enter administration for the second time, compounding the negative sentiment surrounding the retail market. Next’s recent results sum up the current state of the retail market with their overall profits up however the split between High Street sales (down 9.2%) and online sales (up 15.2%) proving the weakness of the High Street. This statistic does not bode well for those retailers with a poor online offering.
On a more positive tone, local shopping parades are proving attractive to investors as they are less affected by the rise of e-commerce.
From an occupational view, the balance of power remains with the tenants as landlords offer incentives to keep tenants in place.
Allsop recently advised on the sale of HSBC Kingston achieving £7.445m reflecting 4.75% NIY and 72 & 74 Promenade Cheltenham sold for £4.68m reflecting 5.17% NIY.
The retail warehouse sector continues to be subdued with tenant instability, rising labour costs and weaker consumer wage growth impacting investor confidence. Transactions in this sector were down in Q4 2018 with only £120 million transactions in the quarter – less than a quarter of the volume when compared with Q3.
Prime yields are 5.50% – 6.00% dependent on a variety of parameters with secondary parks trading for 7.50% + NIY. Successful parks are those that can benefit from a relationship with online retailing. “Click and collect” is continuing to grow and those retail parks that incorporate this can be successful.
Notable transactions across Q4 include London Metric’s sale of Martlesham Heath, Ipswich to Ipswich Council for £22 million reflecting 5.20% NIY, Evesham Shopping Park was purchased by Custodian REIT for £14.2 million reflecting a NIY of 6.04% and Darlington North Retail Park for £9.915 million reflecting a NIY of 6.20%, where Allsop advised on the purchase.
Against a backdrop of persistent geopolitical uncertainty and slow economic growth rates the office sector has remained popular with the return of the big ticket transaction in Q4. Provisional figures suggest that the total value of office investment transactions for the quarter are at £1.591 billion, an almost 200% increase from Q3 2018, with circa £1 billion transacted in just 6 deals. Continued depreciation in the sterling has no doubt played its part with foreign investors continuing to invest into the UK for strong returns and relative stability.
We expect no slowdown in the sector going into 2019 as demand and supply remain in equilibrium. With developers continuing to take advantage of office to residential conversion opportunities, particularly in the South East, and the total amount of office space only growing modestly, low vacancy rates offer investors peace of mind in the market’s flight to safety.
Notable deals in Q4 2018 include the £280m Hayhill Portfolio, 98 regional offices let to the Department for Work and Pensions, purchased by Singaporean investor Elite Partners Capital and the £100m Microsoft Campus in Thames Valley Park purchased by Valesco Group and South Korean based AIP Asset Management.
Market volume totalled over £12.5bn in 2018. Whilst volume has decreased slightly on the previous year, number of transactions has increased confirming strong market activity comparable to what was widely considered a stellar 2017.
Market activity is again, in a similar case to last year, hampered to a degree by incorrect portfolio composition. This is the most apparent within the secondary value-add portfolio arena where, in the unchartered waters we find ourselves in, purchasers are increasingly selective. Failure to respond to this can lead to portfolio breakup or withdrawal from the market, often to the detriment of the end achievable price.
Notable transactions in 2018 included the Arches Portfolio, comprising around 5,200 properties acquired by Telereal Trillium for £1.46bn from Network Rail and Project Owl, a high quality industrial and logistics portfolio purchased by Ascendas REIT for c.£205m (NIY: 5.22%).
Allsop successfully advised on the acquisition of the Cedar Portfolio for Kames Property Income Fund for £39.9m (NIY: 5.85%) and disposal of the Acute Portfolio, comprising three multi-let offices in North London for Workspace at £51.85m (NIY: 4.1%).
Looking forward, investor demand remains consistently strong, albeit selective. Industrial Portfolios represented the single most sought after asset class in 2018 and it is expected this trend will continue, albeit on a reduced scale given ongoing stock shortages within the market. Institutional demand continues to shift towards long income and defensive stock which again is in short supply whilst large scale overseas investment is expected to continue unabated.
Unsatisfied demand from 2018 will be placed under increasing pressure to invest. Competitive bidding was often the norm last year and premiums for well composed portfolios will likely continue to be achieved.