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UK commercial property deals slump

Brexit uncertainty and the prospect of further monetary easing has led to a lack of supply within the UK commercial property market
July 11, 2019

Transactions within the London office market sank to a 20-year low during the second quarter as investors hold on to assets amid political uncertainty, anticipation of a correction in some property values and the prospect of lower-for-longer interest rates.

Just £820m in London office transactions took place between April and June, according to data from Savills (SVS), taking the first-half total to £2.99bn across 46 deals, well down on the five-year average of 77. However, there has been some rebound during the first week of July, with over £400m exchanged in the City, surpassing the £318m exchanged in the whole of June.

“The bucket is empty,” said Savills' head of London investment, Stephen Down. While Brexit uncertainty has played a part in the low level of buying and selling activity, low interest rates have also encouraged investors to hang on to property investments, Mr Down said. However, there was still a high level of appetite from domestic and international investors for London offices, he added.

The London office market has proved more resilient than some might have expected post-referendum, with vacancy rates at 5.1 per cent at the end of May, according to Savills. Meanwhile, Savills’ prime city yield remained at 4.25 per cent in June, a historically low level. 

Market activity outside London has also been sluggish, with regional office transactions totalling £1.8bn during the first half, according to Savills, a 43 per cent drop on 2018.     

Frederik Widlund, chief executive of CLS (CLS), a commercial developer and landlord in London, as well as in France and Germany, said he had experienced a significant decline in buying opportunities.  

“We have been buying,” said Mr Widlund. “But it’s just hard to find the right things to invest in right now.” Increasing investment in France and Germany could be an option if low levels of market activity persisted, he added. 

Guy Glover, manager of BMO's UK Property Fund (GB00BWZMHK32), cited the potential for further monetary easing by the Federal Reserve and European Central Bank as increasing the attractiveness of holding on to UK office assets. “If that happens, then property yielding 400 basis points above gilts looks good,” said Mr Glover. 

Yet some UK real estate investment trusts (Reits) are hoping to deploy their increased capital resources in anticipation of a moderation in valuations.

“Some of the buyer group is perhaps taking a ‘wait and see’ approach not just on Brexit, but on cyclical values within the market,” said Phil Cann, UK head of investment properties at real estate services group CBRE. That could particularly be the case for Reits that are looking for value and are more willing to invest in higher-risk assets that may need redevelopment, he said. 

McKay Securities' (MCKS) chief executive, Simon Perkins, believes that after a steady rise in valuations across the market, there may be a greater polarisation as the market becomes increasingly mature. “The high-risk assets, where there’s a need for refurbishment and reletting, these values may move away from the prime,” according to Mr Perkins. 

Regional industrial and office developer and landlord Regional Reit (RGL) is attempting to raise £50m via a share placing, which it hopes to deploy in “a market with fewer investors for the type of assets we are currently reviewing”, said Stephen Inglis, chief executive of the fund’s manager, London & Scottish Property. “There’s a lot of money sitting on the sidelines,” said Mr Inglis.  

Meanwhile, Schroder Real Estate (SREI) has also been building up resources in the hope of reinvesting at higher yields, following a market correction. “We are hopeful that we can redeploy at yields of 6-7 per cent,” said Mr Montgomery. 

Over the past three years, the fund has sold more assets than it has bought, said Mr Montgomery. “In the past few years, when we have been late cycle, we have got a higher return on investing in our own assets rather than buying new ones,” he said.