Transactional volumes of £17.2bn in Q3 saw the year-to-date total reach £44.5bn. This is the second highest level on record after 2014 (£45.5bn), 6% ahead of last year’s total of £41.9bn, and 36% ahead of the 10-year average of £32.6bn. Despite the ongoing political uncertainty and the adverse impact on sentiment, the strength of the UK commercial property investment market highlights both the continued attractiveness of the asset class and the amount of capital targeting UK real estate. While we do not anticipate Q4 transactions reaching the £22.9bn seen last year, it now appears likely that we will comfortably exceed our initial forecast of £55bn for 2018.
The growing disconnect between sentiment and performance appears to be driven by the strength of overseas demand for UK real estate. The short-term economic and political concerns brought on by the UK’s ongoing Brexit process are the main cause of subdued domestic demand, but for many global investors this is less of a consideration, while the yield and currency advantages gained from these conditions represent a significant buying opportunity. Across the UK this year, overseas buyers have accounted for 52% of all purchases, a figure that rises to 72% in Central London.
The accelerating pace of structural changes reshaping the retail sector is also creating opportunities for investors, highlighted by the recent bid to take retail REIT Intu private.
Big deals continue to shape the Central London market
In Q3 we saw the fourth £1bn deal in the City since March 2017, as the National Pension Service of Korea snapped up Goldman Sachs’ new midtown HQ at Plumtree Court. In the West End too, big deals were the story of the quarter, as Pontegadea’s £550m purchase of The Adelphi and Deka Imobilien’s £455m acquisition of Verde combined to account for over 60% of Q3 volumes. South Korean buyers remain very active, but this year we have seen a more diverse spectrum of purchaser types and nationalities than last year, when private Hong Kong buyers dominated.
Regions go from strength to strength
The regional markets continue to perform strongly, with £13.5bn transacted so far this year. We have previously highlighted the outperformance of Scotland, and this continues with £1.8bn traded over the first 3 quarters, up 46% from the equivalent period last year. The North West (£1.9bn, up 19%), West Midlands (£1.6bn, up 10%) and Yorkshire & the Humber (£1.5bn, up 67%) are the other big winners this year. The South East has seen healthy volumes of £3.3bn over the first three quarters, but this is 30% down on last year’s record breaking levels.
The strength of investment across the regions is supported by the strength of the leasing markets. Across the Big 6 city centres, 4.7m sq ft of office space has been leased, already well ahead of the long-term annual average, and on course to exceed last year’s record total.
Portfolio sales have also been extremely strong, with £11.3bn of portfolio transactions so far this year, up 38% on last year. Network Rail’s £1.5bn sale of the Arches Portfolio to Blackstone/Telereal Trillium boosted this figure, as did several significant PRS, Student Housing and Hotel portfolios.
Stable outlook but the usual year-end spike is unlikely
Typically we see a surge in activity towards the end of the year as both buyers and sellers rush to complete deals before year-end, with Q4 volumes often representing around a third of the annual total. With Brexit negotiations finally coming to a head, and with most of the large lots on the market already traded, we do not expect the usual Q4 flurry of activity. However, we do expect overall volumes to comfortably exceed our previous forecast of £55bn across 2018. Blackstone’s £800m purchase of Birmingham’s NEC in October offers encouragement, as do a number of Central London assets already traded in Q4.