INVBRIEF Property investment market - International Property Consultants - Gerald Eve
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INVBRIEF
Property investment market
Summer 2018
International Property ConsultantsINVBRIEF Property investment market
2.4%
ECONOMY
Recent economic data has been rather a The retail picture has however improved
mixed bag with some poor figures from recently with consecutive month-on-month
CPI Inflation May 2018 (ONS) indicators in the industrial and construction sales volume growth of 1.6% in April and
sectors being offset by positive figures in the 1.3% in May according to the Office for
form of low unemployment and improving National Statistics (ONS), possibly buoyed
retail spending. by the good weather and the royal wedding
feel-good factor.
Unemployment remained at a historic low of
4.2% in April as the number of workers was UK consumer borrowing recovered in April
440,000 higher than a year earlier at 32.4m. with £1.8bn borrowed according to the Bank
0.2%
Employment in the 16 – 64 age category of England, taking the 12 month growth rate
now stands at a record 75.6%. Pay growth in consumer lending to 8.8%. This followed
is also rising at above inflation rates with a significant slowdown in March when the
regular earnings growth reported in May consumer debt only rose by £400m.
GDP Growth Q1 2018 (ONS) standing at 2.9% as upwards pay pressure Consumer debt represents a key risk to the
continues to gain momentum. Despite the financial security of some households,
impressive employment figures, GDP growth particularly if interest rates rise as anticipated.
remained stubbornly sluggish with reported
growth over Q1 2018 of 0.2%. Retail CPI remained at 2.4% for the third
experienced a particularly tough trading consecutive month in May which was down
quarter in Q1 with the “Beast from the East” from a six year high of 3.2% in November
blamed for a 1.2% fall in sales in March. 2017. This was despite the impact of
The April figures reported a rebound which escalating petrol prices which increased by
suggests the overall Q2 period will show a an extraordinary 3.8% in May, the highest
marked improvement. monthly increase since January 2011.
The inflationary pressure of higher fuel
The mixed economic data led to the costs on consumer prices is being offset by
Monetary Policy Committee (MPC) holding the inflation which followed the fall in sterling
interest rates at 0.5% in May and again in dropping out of the 12 month figures.
June despite the positive messages that The resulting opposing inflationary pressures
Mark Carney, the governor of the Bank of mean that the direction of CPI is difficult to
England, was spreading earlier in the year; predict in the short term.
when a May interest rate rise looked to be a
near certainty. The accompanying notes to Brexit uncertainty remains a key factor in
the MPC’s June meeting suggest that rates business decision-making with seemingly
are now likely to rise in August albeit there little progress being made over the last
was a more cautionary tone in the language quarter in the ongoing negotiations. Mark
used than previously. The impact of the Carney commented in front of the Treasury
delays to interest rates rises has been felt in select committee that Brexit is costing
the currency markets as sterling has fallen average households at least £900 per year
against other major currencies since the and the economy is already £40bn smaller
beginning of April. than it could be as a consequence of the
Brexit vote. Carney attributed the poor
The tough retail trading conditions in performance to businesses holding back
recent times have seen a number of from making investment decisions due to
well‑established high street retailers uncertainty, as well as exchange rate
restructuring their operations and in some induced inflation which has put pressure
instances ceasing to trade. The shift in on consumer spending power. Pro-Brexit
consumer spending patterns towards online economist Julian Jessop, chief economist at
continues and the impact of this continues the Institute of Economic Affairs commented
to be felt by traditional retailers who have “There is little doubt that the UK economy
been slow to adapt. The continued weak has grown more slowly as a result of the
currency environment has also not been additional inflation and uncertainty following
helpful as margins have come under the Brexit vote, but Carney’s estimate looks
sustained pressure. too high.”
Page 2 Summer 2018Summer 2018
Fig 1. CPI vs Nominal Wage Rate Inflation - Jan 2006 = 100
Outlook Source: Office for National Statistics
Despite the mixed economic performance 140 CPI
in the first half of 2018, there are some Nominal Wage
encouraging signs which point to an 135 Rate Inflation
improving economic outlook. The Q1 figure 130
for 2018 GDP growth in the UK economy
125
was 0.2%, which was poor compared with
the 0.4% in the previous quarter, albeit it 120
was better than had been expected.
115
The June survey by the Chartered Institute
of Procurement and Supply (CIPS) reported 110
the strongest growth in services activity for
105
eight months, suggesting better prospects
for the economy this year and strengthens 100
the case for a further interest rate rise in
Mar 2006
Mar 2007
Mar 2008
Mar 2009
Mar 2010
Mar 2011
Mar 2012
Mar 2013
Mar 2014
Mar 2015
Mar 2016
Mar 2017
Mar 2018
August. It will be very interesting to see if
the second quarter of 2018’s GDP figures
pick up.
Some significant downside risks do Fig 2. Unemployment rate (aged 16 and over, seasonally adjusted)
however remain. The uncertainties Source: Office for National Statistics
surrounding Brexit withdrawal terms have
not subsided with the lack of progress on %
trade and investment negotiations causing 14 Unemployment rate
(aged 16 andover,
concern amongst businesses. The potential seasonally adjusted)
12
trade war due to President Trump’s
proposed trade tariffs and the attendant 10
reciprocity on US goods threatened by
those impacted such as the EU, China and 8
Canada may also delay large investment in
6
sectors and regions that are threatened.
4
On the retail front, there have been notable
retail closures already in 2018 together with 2
announcements of significant restructuring
0
for some of the largest retailers such as
2006
2010
2014
2018
1974
1978
1982
1986
1990
1994
1998
2002
House of Fraser, Marks and Spencer and
Next over the coming year. Furthermore,
the closure of high street retail service
locations amongst banks, estate agents
and travel agents has contributed towards Fig 3. Consumer Debt Per Household (excluding student loans)
an unfavourable rental growth climate for the Source: Bank of England, Office for National Statistics
retail sector. In this regard, higher business
rates have not helped. Pressure on landlords £
to reduce rents over the coming months will 8,500 Consumer credit per
household (excluding
be a hallmark. Structural change in the retail 8,000 student loans)
sector is now firmly taking hold.
7,500
Consumer spending is under pressure as a 7,000
result of high household debt and subdued
6,500
wage growth, albeit real wage growth is,
just, in positive territory. Weak productivity 6,000
will constrain real wage growth with the
5,500
consequent impact on consumer spending.
There are however some positive signs. 5,000
Offsetting factors are the low pound and a
5,000
strengthening global economy, where
2018
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
exports may be expected to be higher.INVBRIEF Property investment market
1.9%
COMMERCIAL PROPERTY
Total returns for UK commercial property in Standard industrial total returns were 21.2%
the 12 months to March 2018 were 10.0% whilst distribution warehouse delivered total
All property total return according to MSCI quarterly data, with the returns of 17.5%. Capital growth in these two
Q1 2018 (MSCI) total return reported for Q1 2018 standing at asset types has considerably outperformed
1.9%. The All Property total return index is the rest of the market with standard industrial
now 13.4% above where it was in the period growing by 15.8% whilst distribution
preceding the Brexit vote in June 2016. warehouses recorded growth of 11.8% over
the 12 months to March 2018.
Commercial property capital growth slowed
to 0.8% in Q1 2018, the lowest quarterly Industrial total returns were strongest in the
5.5%
capital growth since Q3 2015, as speculation Eastern region but closely followed by
of steeper than expected interest rate rises London as both regions posted returns of
slowed the rate of capital growth in the sector. 5.1% for Q1 2018. Total industrial returns in
Capital growth in the 12 months to March London were 24.8% in the 12 months to
All property equivalent 2018 was 5.1% across the commercial sector. March 2018 as investor appetite for the
yield Q1 2018 (MSCI) sector continued to drive capital growth.
Total returns Total returns in the South East region were
City and West End office total returns 21.0% over the year.
continue their positive run delivering total
returns of 7.7% and 7.0% respectively over Rental growth
the 12 months to March 2018. Both West Commercial property rental growth fell to
End and City offices have had consecutive 2.0% in the 12 months to March 2018 and
periods of positive capital growth with both 0.3% in Q1 2018 according to MSCI
capital growth indices having made up all the quarterly data. This was the lowest quarterly
ground lost following the Brexit vote. growth rate since Q3 2013.
Retail had a difficult quarter with most regions City office rental growth was barely positive
delivering poor total returns for the quarter, in Q1 2018 as the rental growth over the 12
reflecting tough trading conditions and poor months to March 2018 was just 0.3%. West
spending figures. West End retail was the End office rental growth was slightly stronger
strongest performing retail market where total at 1.3% over the 12 month period.
returns were 2.7% over the quarter and
12.3% in the 12 months to March 2018. Industrial rents grew at the fastest rate of all
three major sectors, reaching 5.3% over the
Shopping centres continued their downward 12 month period. This compared to the
trajectory with the seventh consecutive office and retail sectors where rents grew
quarter of negative capital growth. The MSCI by 1.1% and 0.9% respectively.
capital growth index for shopping centres
now stands 7.3% lower than it stood in Industrial rental growth was strongest in
December 2015. Supermarkets were the London where average rents grew by 7.3%
best performing asset class within this over the 12 month period. The Eastern and
segment delivering 1.8% total return in the South East regions also saw strong rental
quarter and 8.4% over the 12 month period. growth of 6.8% and 6.6% respectively.
Rental growth in the standard industrial
The industrial sector was the strongest segment grew at 6.0% and rental growth in the
performing sector for the sixth consecutive distribution warehouse segment was 3.7%.
quarter, delivering total returns of 4.1% over
the quarter. The total return over the 12 Standard shops and supermarkets both
month period was a remarkable 20.0%, experienced negative rental growth in Q1
compared to total returns in the office and 2018 bringing the total rental growth over
retail sectors of 8.0% and 6.2% respectively. the 12 months to March 2018 for standard
Capital growth in the industrial sector was the shop to 1.2%. This is the lowest year-on-
main driver of total return at 14.5% growth year rental growth in the sector since March
over the 12 months to March 2018 driven 2014 and is further evidence of the difficulties
largely by continuing yield compression. that the sector is facing. Supermarkets have
recorded negative rental growth in each of the
last 13 quarters with the exception of Q4 2017
when rental growth was just about positive.
Page 4 Summer 2018Summer 2018
Fig 4. Total Returns – Year to end March 2018
Source: MSCI
Standard retail rental growth was strongest %
in London as 4.6% growth was recorded in 25
Income Return
the West End over the 12 month period.
Capital Growth
Several regions have seen negative rental 20
Total Return
growth in the 12 months to March 2018 with
Northern Ireland rents contracting by 1.5%. 15
The East Midlands saw the fastest falling
retail rents in England as rents contracted by 10
0.8% in Q1. Rental growth in the shopping
centre segment was 1.2% whilst retail 5
warehouse saw growth of 1.1%.
0
Yields
Average commercial property equivalent -5
yields in Q1 2018 stood at 5.5% according to
All property
Standard
shops
Retail
warehouses
Shopping
centres
All offices
City offices
West End
offices
South West
offices
Standard
industrials
Distribution
warehouses
MSCI quarterly data, having contracted by 27
bps since Q1 2017. Yields have fallen by the
most in the industrial sector during this period
standing at 5.7% down from 6.1% a year Fig 5. Annual capital growth by sector
earlier. Office yields across the UK fell to 5.7% Source: MSCI
whilst retail yields fell to 5.5% in Q1 2018.
%
Yields in the standard industrial segment 30 Industrial
fell by 61 bps to 5.6% over the 12 month Office
20
period whilst distribution warehouse yields Shopping Centres
fell by 48 bps to 5.5% over the same period. 10
Standard Shop
Regionally, the largest movement in Supermarket
equivalent yields has been seen in Wales, 0 Retail
where industrial yields in Q1 2018 stood at
-10
7.3%, down from 8.9% a year earlier.
London has also seen strong yield -20
compression with industrial yields standing
at 4.8%, down from 5.4%. -30
-40
West End office yields stood at 4.3% at Q1
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2018 whilst City and Mid Town yields stood
at 5.4% and 5.0% respectively. Yorkshire
and Humber was the only region to see yield
expansion in the office market according to
MSCI quarterly data, as yields moved out 17
bps to 7.2% over the 12 month period.
Standard retail yields have contracted by 10
bps to 3.6% in the West End and by 11 bps
to 4.0% in the City. In the Rest of London,
yields stood at 5.0% according to MSCI
quarterly data.INVBRIEF Property investment market
4.5%
FORECASTS
Rental growth
According to the 2018 Q1 RICS UK Ongoing concerns about Brexit and the
Gerald Eve Total Return Commercial Property Market survey, potential relocation of office staff continues
forecast for 2018 respondents indicated that the demand for to endure, but there is no evidence of an
retail space had dropped to its lowest level across-the-board intent to relocate staff
since 2009. The survey also reported that for overseas. There however is a small risk that
the fourth consecutive quarter retail landlords a substantially negative outcome of Brexit
had increased the value of incentive negotiations may lead to some firms
packages in order to entice potential tenants. reviewing this position, particularly in the
finance sector.
“ Given the drawn-out Brexit The retail market continues to face acute
challenges. The backdrop of rising interest The retail sector is expected to deliver the
uncertainty now coupled
rates and lower growth in employment will lowest rental growth of the three main
with potential trade wars, we likely constrain the growth in household sectors, with all three sub-sectors, standard
predict greater than previously spending. Consumer spending is anticipated shops, shopping centres and retail
anticipated yield softening in to slow down in 2018 before picking up warehouses forecast to exhibit negative rental
the retail and office sectors. ” marginally in 2019. The outlook for the retail growth in 2018 and 2019. Despite retail
sector continues to remain fragile as a result warehouse vacancy rates being at the lowest
of weak consumer demand and restructuring levels since 2001, rental growth has remained
in the sector. Of all the retail segments, we weak, as has capital growth. This has largely
remain relatively sanguine about rental reflected the view that retail property is being
growth for retail warehouses. adversely affected by internet shopping,
which now accounts for some 15% of retail
Demand for offices remains high, together sales in the UK.
with relatively low vacancy rates and relatively
low availability. Speculative completions in The availability of industrial land remains at
the City and West End will not reduce the low levels, as does speculative development,
supply shortages materially in these sub- whilst demand remains high. Consequently,
markets. However, given the limited we anticipate that standard industrial and
availability of Grade A product, the short term distribution warehouses will deliver the
outlook for rental growth for regional office highest rental growth figures over the five
markets (especially the South East), remains year forecast period. In 2018 rental growth
more favourable than for the City and West will be in excess of 3% falling off gradually to
End markets. slightly over 2% in 2020.
Table 1. Rental growth forecast (%pa) Table 2. Total return forecast (%pa)
Sector 2018 2019 2020 Average Sector 2018 2019 2020 Average
2018-22 2018-22
Standard shops -1.0 -0.9 0.6 0.2 Standard shops 3.0 3.2 4.1 4.0
Shopping centres -1.5 -1.2 0.2 -0.1 Shopping centres 1.2 1.5 4.4 3.5
Retail warehouses -0.5 -0.3 0.6 0.2 Retail warehouses 3.8 4.7 6.2 5.4
West End offices -0.1 0.5 0.9 1.6 West End offices 2.6 3.1 3.4 3.6
City offices -0.2 0.2 0.6 1.0 City offices 2.7 2.9 3.3 3.7
South East offices 1.2 1.4 1.5 2.4 South East offices 6.2 5.3 6.7 6.6
Offices (all) 0.0 0.5 0.9 1.5 Offices (all) 3.6 3.3 4.2 4.4
Standard industrials 3.8 2.6 2.1 2.6 Standard industrials 10.6 7.3 5.0 7.1
Distribution warehouses 3.4 2.4 2.3 2.5 Distribution warehouses 8.6 6.7 5.6 6.5
All property 0.4 0.3 1.0 1.1 All Property 4.5 3.9 4.5 4.7
(1.0) (0.6) (1.0) (1.2) (5.2) (3.4) (4.2) (4.8)
Figures in brackets represent IPF Consensus Forecasts Figures in brackets represent IPF Consensus Forecasts
Page 6 Summer 2018Summer 2018
Fig 6. Historic and forecast 5yr annualised total return
Source: Gerald Eve Research, MSCI
Total returns %
Our base case continues to be for a general 18
2013-2017 (actual)
softening of yields in the latter part of 2018 for
16 2018-2022 (forecast)
both the office and retail sectors. The impact
of reduced economic certainty for financial 14
services firms, especially in the City of London 12
is limited. Whilst businesses would dearly like
10
to have a clearer picture of the potential
economic outlook, it remains to be seen if 8
there is a fall-off in office investment. 6
Reflecting the ongoing situation and attendant 4
uncertainty we have revised downwards our
2
total return forecasts for the retail and office
sectors for 2019 and 2020. 0
Standard
shops
Shopping
centres
Retail
warehouses
City offices
West End
offices
South East
offices
All offices
Standard
industrials
Distribution
warehouses
All Property
Given the drawn-out Brexit uncertainty now
coupled with potential trade wars, we
anticipate higher than previously foreseen
yield softening in the retail and office sectors. Fig 7. Annual rental growth forecasts
As previously, we do not currently foresee Source: Gerald Eve Research, MSCI
adverse yield impacts on industrials. Indeed,
given the continuing investment attraction of %
industrials, it is more likely that there will a 7
2017 (actual)
positive impact on capital values in 2018, 6 2018
potentially carrying through to 2019. 2019
5
Investment volumes recorded in 2017 4
reached some £65bn, with the industrial 3
sector attracting high volumes of capital.
2
The ongoing mix of robust demand for
1
industrial space and restricted supply
ensures that standard industrials will be the 0
best performing sector in 2018 and 2019, -1
delivering 10.6% and 7.3% respectively.
-2
Over the period 2018-2022 standard
All Property
Shopping
centres
Retail
warehouses
City offices
West End
offices
South East
offices
All offices
Standard
industrials
Distribution
warehouses
Standard
shops
industrials are expected to deliver the best
performance, averaging annual total returns
in the region of 7%.
Distribution warehouses continue to be in
demand by investors, underpinned by the
growth in e-commerce. We anticipate a
continuing, albeit slowing, growth profile in
e-commerce over the coming years.
Distribution warehouses are therefore also
expected to deliver sound total returns;
8.6% in 2018 and 6.7% in 2019. The annual
average total return over the five years
2018-2022 is expected to be in the region of
6.5%, some 0.6% short of the performance
of standard industrials.
We expect All Property total returns in 2018 to
be halved compared with 2017 (10.2%), being
in the region of 4.5%. In 2019 total returns are
expected to fall to 3.9%. Over the five-year
period 2018-2022, average annual total returns
are expected to be in the region of 4.7%.INVBRIEF Property investment market
“ Investment volumes in the INVESTMENT & TRANSACTIONS
West End are expected to
City office investment
bounce back later in the year. ”
Following a year of strong investment activity Overseas capital was behind all the major
in 2017, trading has been subdued in 2018 transactions in the year, with investors from
with only £1.1bn transacted in Q1 2018, the Canada, China, Hong Kong, Germany,
lowest transaction volume over a quarter Norway, Singapore, and the Middle East taking
since Q3 2016, according to Property Data. advantage of the weaker pound and snapping
However despite this fall in activity, many up some of the West End’s best assets, some
owners are continuing to market their assets at slight discounts to asking prices.
in order to capitalise on the strong overseas
demand for the City’s trophy buildings. Investment volumes in the West End are
“ Prime rents in the largest expected to bounce back later in the year,
Whilst new regulations in China have started largely due to the potential sale of one of
regional cities are expected to
to impact on demand, the City has received the market’s biggest assets, Verde SW1 in
continue to rise during 2018 and strong interest from South Korea, which Victoria. Agents were appointed to sell the
secondary markets are also likely accounted for one of the largest deals of property in March 2018, when it reached
to see upward movement. ” 2018 so far. South Korean investors, FG full occupancy, with the asking price set at
Asset Management, bought Cannon Bridge £535m. The property was reported to be
House from Blackstone for £248m, reflecting under offer in early July for more than
a net initial yield (NIY) of 5.2%. £450m, representing a c. 4.5% NIY.
The largest purchase of the quarter came Likewise, the market could also be boosted
from South Africa, when investor Zeno with the sales of Marks & Spencer’s head
Capital, paid Evans Randall £400m for office at 35 North Wharf Road in Paddington,
Riverbank House, the 320,000 sq ft office and 20 Soho Square in Soho, which were
building which is the headquarters of hedge also put up for sale at the beginning of the
fund Man Group. year for £250m and £100m, respectively.
However, beyond the headline deals, trading Regional Offices
has been fairly quiet. The reduction in the Regional office investment transaction
number of transactions partly reflects an levels in Q1 2018 were relatively subdued
aversion to risk in the light of worsening compared to the frenetic final quarter of
fundamentals and concern over the impact 2017 but the occupational story was much
of Brexit on both occupier demand and more positive with 1.33m sq ft of take-up;
liquidity. Notably, the average vacancy rate of 14% up on the five-year Q1 average.
buildings that have traded over the last 12
months was just 3%, reflecting the current Prime rents in the largest regional cities are
investor preference for prime, well-let expected to continue their rise during 2018
buildings. The value-add deals that were so and secondary rents are also likely to see
prevalent a couple of years ago have largely further upward movement as a result of the
dried up, with riskier assets proving a shortage of Grade A accommodation and
tougher sell in the current climate. strong investor demand targeting the core
provincial centres.
West End office investment
Transaction volumes for West End offices Strong leasing activity in the regional markets
have eased in 2018, with only £212m during recent years has depleted Grade A
transacted in the first quarter, a 41% availability. The development pipeline, in the
decrease on the previous quarter. However, short term, is below the five year average
foreign investors continue to be active, and take-up level for most regional markets. This is
accounted for the two largest deals of the expected to fuel rental growth in the regions.
quarter; Middle Eastern investors bought
119-127 Marylebone Road, from WELPUT The recently agreed and continued roll-out
for £55m, reflecting a NIY of 4.5%, and of Government Property Unit (GPU) deals
Swiss investors, with AFIAA Investment (HMRC Regional Hubs), coupled with
Company, purchased 12 Golden Square moderate levels of speculative development,
from UBS for £52m, reflecting a NIY of 4.0%. have continued to impact on the supply and
demand imbalance making many regional
centres more attractive to investors. Investor
demand has continued throughout the first
half of 2018 driving down yields to record
lows in many of ‘the big six’ regional cities.
Page 8 Summer 2018Summer 2018
Fig 8. March 2018 vs March 2017 UK equivalent yields
Source: MSCI
%
Q1 2018 GPU occupational transactions
7.5
include Building 1, Atlantic Square in March 2017
Glasgow where 187,205 sq ft was secured, March 2018
7.0
along with Three New Bailey in Manchester
where 157,000 sq ft was secured. 6.5
Manchester appears to be top of many 6
investors regional target markets due to a
combination of the supply and demand 5.5
imbalance and the political commitment to
the “Northern Powerhouse” gaining credibility 5.0
and momentum. This has led to Manchester
currently having the lowest prime yields in the 4.5
UK regional cities at 4.75%. With strong
Shopping
centres
Standard
shops
Supermarkets
Retail
warehouses
Standard
offices
Distribution
warehouses
Standard
industrials
Office park
investor and occupational demand, as well as
continued rental growth, Manchester prime
yields could still see further compression.
Fig 9. Overseas investment in London real estate (12 month rolling average)
A mix of investors were active in Q1 with Source: Property Data
West Midlands PF acquiring City Point in
Leeds for £26.0m reflecting a 5.8% NIY, %
Mayfair Capital’s acquisition of 6 Queen 100
Others
Street for £37.2m at a NIY 5.4%, Aviva 90
Far Eastern
acquiring Two New Bailey Square for 80 Middle Eastern
£127.7m and L&G’s acquisition of Atlantic 70 US
Quay 3 for £56.2m, reflecting a 3.75% NIY. Other European
60
Irish
50
Retail German
Prime retail yields have remained relatively 40
stable in Q1 2018 despite total investment 30
transaction volumes being down 47% on Q1 20
2017 at £1.4bn. 10
0
Prime London trophy assets continue to be
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
in demand with the sale of Thor Equities and
Meyer Bergman’s Burlington Arcade to the
Reuben Brothers for c. £300m reflecting a
NIY of c. 3.25%. Having been originally
marketed in January last year at £400m,
pricing for the 0.5 acre Mayfair arcade was
revised to £350m later in the year which has
subsequently led to a sale being agreed.
Prime high street assets have continued to
sell well, in particular with private investors.
128 Kings Road in London’s SW3 was
brought by a private family for £7.3m,
reflecting a NIY of 2.9%. However, appetite
for regional towns and secondary retail
locations has been subdued, as high street
retail continues to struggle.
Despite the headwinds in the occupier
market, investment in the retail warehouse
subsector continues to remain stable,
demonstrated by LaSalle IM’s purchase of
Watford Retail Park for £52.5m reflecting a
NIY of 5.4%.INVBRIEF Property investment market
“ The UK industrial sector has INVESTMENT & TRANSACTIONS
continued to attract significant (CONTINUED)
levels of capital for both single-
Shopping centres have seen Q1 2018 So far in 2018, UK institutions and overseas
let distribution warehouses and transaction volumes (£337m across 11 investors have been particularly acquisitive;
multi-let industrial assets. ” transactions) fall 9% on Q1 2017. This was by broad purchaser sector, they have been
notably the lowest level since Q1 2008 the largest net purchasers of distribution
(£304m) according to Property Data. warehouse property. The outlook for
This has been driven by the series of retailer industrial pricing is currently divided by
administrations seen within the retail market competing pressures; on the one hand many
which has continued the negative sentiment investors are targeting the sector, and many
towards the sector. Despite this, yields have are taking an innovative approach to the UK
“ Significant yield compression as remained relatively stable. logistics market, focussing on thematic
strategies or a particular geography. On the
institutional investors recognise
Supermarkets have continued their recovery, other hand, the outlook for underlying interest
that the alternative market is driven by the sector offering secure long rates appears to be less supportive for
one of the few sectors with long term income with index-linked reviews. property pricing and there will be pressure on
index-linked rent... ” The total value of supermarket transactions maintaining these levels of yields.
recorded a 62% increase for the first quarter
of 2018 on a year-on-year comparison. Major distribution warehouse deals concluded
One noteworthy transaction was Invesco’s during Q1 include Tritax Big Box REIT buying
purchase of Morrison’s supermarket in Eddie Stobart’s warehouse in Corby (£81.8m
Colindale from Aberdeen Standard for at 5.0% NIY) and Howdens’ warehouse in
£43m, reflecting a NIY of 4.6%. Warth Park, Raunds (£71.2m at 5.0% NIY).
Tritax also purchased a warehouse in Crewe
Industrial let to Expert Logistics (a subsidiary of AO
The UK industrial sector has continued to World) for £36.1m reflecting a 5.4% NIY.
attract significant levels of capital for both Other deals include Legal and General’s
single-let distribution warehouses and purchase of Woodside Industrial Estate in
multi-let industrial assets. Competition for Dunstable (£182.4m at 5.0% NIY) and First
the stock that has come to the market has Panattoni, a relatively new entrant to the UK
been fierce and we have seen very market, purchasing a secondary warehouse
competitive bidding on good quality assets. with development potential in Borehamwood
The strength of the occupier market, the for £53m.
ongoing shift to internet retail, rising rents,
and moderate levels of speculative In terms of standard industrial investment
development has attracted several investors activity, we recorded the completion of four
to the sector and in turn have forced yields portfolios over £50m in Q1 2018, which
to record lows. accounted for 27% of all standard industrial
investment volumes. These included
According to MSCI, distribution warehouse Blackstone Real Estate and M7 Real Estate’s
equivalent yields ended 2017 sharper than all purchase of The Powerhouse Portfolio for
UK offices. This marks the first time in over £320m at a NIY of 6.3% and the Magnus
ten years that this has occurred and reflects Portfolio for £150m at a NIY of 6.4%, and,
the levels of pricing being achieved in the Warehouse REIT Plc’s purchase of a portfolio
market. In certain markets, particularly of 51 assets for £116m at a NIY of 6.7%.
London, where prime yields are at 4%, yields
are significantly sharper than the peak of the Leisure
previous cycle. With prime yields at levels The last quarter has seen significant yield
around 4%, the outlook for values looks set compression in the investment market as
to be supported more by growth in rents institutional investors recognise that the
rather than significant levels of further positive alternative market is one of the few sectors
yield impact over the medium term horizon. with long index-linked rents and benefits
from continued growth in turnover and
improvements to KPIs. There are concerns
over real wage growth due to Brexit, however,
looking forward there is significant M&A in the
hotel sector which should lead to further
portfolio optimisation, sales and acquisitions.
Page 10 Summer 2018Summer 2018
Fig 10. Q1 2018 Acquisitions, Disposals and Net Investment By Investor Type
Source: Property Data
£m
In the hotel sector, one of the largest 6,000
Sales
acquisitions was the sale of 14 UK hotels
Acquisitions
from Principal Hotel Group, a Starwood 4,000
Net Investment
Capital owned company to Foncière des
Régions, in a deal worth £858m. In the hotel 2,000
investment market, yields have compressed
to record levels. The two key deals in Q1 0
were the Travelodge Harrow, recently
acquired by Blackrock for a reported NIY of -2,000
3.8%, and the acquisition by LaSalle IM of
the Travelodge King’s Cross for a reported -4,000
NIY of 3.1%.
-6,000
The pub sector remains buoyant. In May
Quoted
Private
Private
institutions
prop co
prop co
investors
investors
Occupiers
Others
Overseas
UK
2018, NewRiver acquired Hawthorn
Leisure’s 298 pub portfolio from Avenue
Capital for a total value of £106.8m, which
reflects a reported NIY of 13.6%, adding to a Fig 11. Commercial Property Purchases – 12 months to May 2018
significant number of portfolio deals in 2017. Source: Property Data
The Restaurant Group has bought four pubs
from the Ribble Valley Inns portfolio, adding
to its current 62 sites. Charles Wells also £456m North East £2,286m West Midlands
intends to open a 3m litre brewery and visitor £2,336m Scotland
£1,000m Wales
centre and pub just outside Bedford having
£1,385m East Midland £3,692m North West
submitted plans on a £13m investment.
£5,484m South East
The leisure activity market has seen continued
growth, attracting adults with new competitive £2,075m South West
socialising concepts. This shows continued
positivity in the context of a fitness industry £1,963m East of England £22,108m London
which, across Europe, saw record levels of
£212m Northern Ireland
membership across 2017, jumping 4% from
the previous year and totalling £23.3bn.
£1,436m
Yorkshire and the Humber
Table 3. Key leisure investment transaction
Source: Gerald Eve
Property Location Tenant Price NIY
Manchester Manchester Various incl. Manchester City Council and £102m 5.6%
Arena JCDecaux
Travelodge – London Travelodge Hotels Ltd £36.3m 3.1%
Kings Cross
Malmaison York Malmaison £44m 4.5%
The Parkway Bury St Various incl. ASK, Cineworld and Giraffe £14.1m 5.0%
Edmunds
Walkabout, Birmingham Intertain (Bars) Ltd £6m N/A
Broad StreetLondon (West End) Leeds
GERALD EVE’S Simon Rees Tel. +44 (0)20 7493 3338 Philip King Tel. +44 (0)113 204 8419
UK OFFICE NETWORK srees@geraldeve.com
London (City)
pking@geraldeve.com
Manchester
Gerald Eve LLP is an independent firm Simon Prichard Tel. +44 (0)20 7489 8900 Callum Robertson Tel. +44 (0)161 259 0450
of chartered surveyors and property sprichard@geraldeve.com crobertson@geraldeve.com
consultants, employing more than 470 Birmingham Milton Keynes
staff across the UK. Jon Ryan-Gill Tel. +44 (0)121 616 4800 Simon Dye Tel. +44 (0)1908 685950
jryan-gill@geraldeve.com sdye@geraldeve.com
We provide a comprehensive range of
services to our private and public sector Cardiff West Malling
clients – including more than 40% of the Joseph Funtek Tel. +44 (0)29 2038 8044 Andrew Rudd Tel. +44 (0)1732 229423
FTSE100 – covering agency, corporate jfuntek@geraldeve.com arudd@geraldeve.com
property management, professional and Glasgow
transaction-based advice. Ken Thurtell Tel. +44 (0)141 221 6397
kthurtell@geraldeve.com
Our philosophy is to serve clients by
identifying opportunities and solving
problems relating to property through
the provision of high quality, thoroughly
researched cost effective advice.
Useful web links Investment agency Gerald Eve research
Gerald Eve research derives some Lloyd Davies – offices (London) We’ve been keeping our clients up to date
of its information for the production Tel. +44 (0)20 7333 6242 with the latest investment trends for 20 years.
of Invbrief from the following sources: ldavies@geraldeve.com It is a co-ordinated effort by the research team,
each of whom has their own area of expertise:
www.bankofengland.co.uk Richard Lines – national
www.ons.gov.uk Tel. +44 (0)20 7333 6274 Robert Fourt
www.gov.uk/treasury rlines@geraldeve.com Tel. +44 (0)20 7333 6202
www.gov.uk/beis rfourt@geraldeve.com
www.oanda.com John Rodgers – industrial
www.ipf.org.uk Tel. +44 (0)20 3486 3467 Alex Vaughan-Jones
www.msci.com jrodgers@geraldeve.com Tel. +44 (0)20 7333 6375
www.propertydata.com avaughan-jones@geraldeve.com
www.propertyweek.com Charles Wilford – leisure
Tel. +44 (0)20 7333 6804 Steve Sharman
Contact details cwilford@geraldeve.com Tel. +44 (0)20 7333 6271
If you require any further details of the facts ssharman@geraldeve.com
and figures presented in this publication or Peter Haigh – hotels
would like to discuss them, please contact Tel. +44 (0)20 7333 6286 George Matysiak – consultant
Alex Vaughan-Jones on +44 (0)20 7333 6375 phaigh@geraldeve.com
or avaughan-jones@geraldeve.com
Michael Riordan – alternative investment
Tel. +44 (0)20 7653 6828
mriordan@geraldeve.com
Richard Moir – specialist
Tel. +44 (0)20 7333 6281
rmoir@geraldeve.com
Callum Robertson – northern England
Tel. +44 (0)161 259 0480
crobertson@geraldeve.com
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