Property investment market - Gerald Eve

House of Fraser, Marks and Spencer and. Next over the coming year. Furthermore, the closure of high street retail service locations amongst banks, estate ...
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INVBRIEF Property investment market Summer 2018

International Property Consultants

INVBRIEF Property investment market

2.4%

CPI Inflation May 2018 (ONS)

0.2%

GDP Growth Q1 2018 (ONS)

ECONOMY Recent economic data has been rather a mixed bag with some poor figures from indicators in the industrial and construction sectors being offset by positive figures in the form of low unemployment and improving retail spending. Unemployment remained at a historic low of 4.2% in April as the number of workers was 440,000 higher than a year earlier at 32.4m. Employment in the 16 – 64 age category now stands at a record 75.6%. Pay growth is also rising at above inflation rates with regular earnings growth reported in May standing at 2.9% as upwards pay pressure continues to gain momentum. Despite the impressive employment figures, GDP growth remained stubbornly sluggish with reported growth over Q1 2018 of 0.2%. Retail experienced a particularly tough trading quarter in Q1 with the “Beast from the East” blamed for a 1.2% fall in sales in March. The April figures reported a rebound which suggests the overall Q2 period will show a marked improvement. The mixed economic data led to the Monetary Policy Committee (MPC) holding interest rates at 0.5% in May and again in June despite the positive messages that Mark Carney, the governor of the Bank of England, was spreading earlier in the year; when a May interest rate rise looked to be a near certainty. The accompanying notes to the MPC’s June meeting suggest that rates are now likely to rise in August albeit there was a more cautionary tone in the language used than previously. The impact of the delays to interest rates rises has been felt in the currency markets as sterling has fallen against other major currencies since the beginning of April. The tough retail trading conditions in recent times have seen a number of well‑established high street retailers restructuring their operations and in some instances ceasing to trade. The shift in consumer spending patterns towards online continues and the impact of this continues to be felt by traditional retailers who have been slow to adapt. The continued weak currency environment has also not been helpful as margins have come under sustained pressure.

Page 2 Summer 2018

The retail picture has however improved recently with consecutive month-on-month sales volume growth of 1.6% in April and 1.3% in May according to the Office for National Statistics (ONS), possibly buoyed by the good weather and the royal wedding feel-good factor. UK consumer borrowing recovered in April with £1.8bn borrowed according to the Bank of England, taking the 12 month growth rate in consumer lending to 8.8%. This followed a significant slowdown in March when the consumer debt only rose by £400m. Consumer debt represents a key risk to the financial security of some households, particularly if interest rates rise as anticipated. CPI remained at 2.4% for the third consecutive month in May which was down from a six year high of 3.2% in November 2017. This was despite the impact of escalating petrol prices which increased by an extraordinary 3.8% in May, the highest monthly increase since January 2011. The inflationary pressure of higher fuel costs on consumer prices is being offset by the inflation which followed the fall in sterling dropping out of the 12 month figures. The resulting opposing inflationary pressures mean that the direction of CPI is difficult to predict in the short term. Brexit uncertainty remains a key factor in business decision-making with seemingly little progress being made over the last quarter in the ongoing negotiations. Mark Carney commented in front of the Treasury select committee that Brexit is costing average households at least £900 per year and the economy is already £40bn smaller than it could be as a consequence of the Brexit vote. Carney attributed the poor performance to businesses holding back from making investment decisions due to uncertainty, as well as exchange rate induced inflation which has put pressure on consumer spending power. Pro-Brexit economist Julian Jessop, chief economist at the Institute of Economic Affairs commented “There is little doubt that the UK economy has grown more slowly as a result of the additional inflation and uncertainty following the Brexit vote, but Carney’s estimate looks too high.”

Summer 2018

CPI

135

Nominal Wage Rate Inflation

130 125 120 115 110 105

Mar 2018

Mar 2017

Mar 2016

Mar 2015

Mar 2014

Mar 2013

Mar 2012

Mar 2011

Mar 2010

Mar 2009

Mar 2008

Mar 2007

Mar 2006

100

Fig 2. Unemployment rate (aged 16 and over, seasonally adjusted) Source: Office for National Statistics % 14

Unemployment rate (aged 16 andover, seasonally adjusted)

12 10 8 6 4 2

2018

2014

2010

2006

2002

1998

1994

1990

1986

0 1982

On the retail front, there have been notable retail closures already in 2018 together with announcements of significant restructuring for some of the largest retailers such as 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 an unfavourable rental growth climate for the retail sector. In this regard, higher business rates have not helped. Pressure on landlords to reduce rents over the coming months will be a hallmark. Structural change in the retail sector is now firmly taking hold.

140

1978

Some significant downside risks do however remain. The uncertainties surrounding Brexit withdrawal terms have not subsided with the lack of progress on trade and investment negotiations causing concern amongst businesses. The potential trade war due to President Trump’s proposed trade tariffs and the attendant reciprocity on US goods threatened by those impacted such as the EU, China and Canada may also delay large investment in sectors and regions that are threatened.

Fig 1. CPI vs Nominal Wage Rate Inflation - Jan 2006 = 100 Source: Office for National Statistics

1974

Outlook Despite the mixed economic performance in the first half of 2018, there are some encouraging signs which point to an improving economic outlook. The Q1 figure for 2018 GDP growth in the UK economy was 0.2%, which was poor compared with the 0.4% in the previous quarter, albeit it was better than had been expected. The June survey by the Chartered Institute of Procurement and Supply (CIPS) reported the strongest growth in services activity for eight months, suggesting better prospects for the economy this year and strengthens the case for a further interest rate rise in August. It will be very interesting to see if the second quarter of 2018’s GDP figures pick up.

Fig 3. Consumer Debt Per Household (excluding student loans) Source: Bank of England, Office for National Statistics £ 8,500

Consumer credit per household (excluding student loans)

8,000 7,500 7,000 6,500 6,000 5,500 5,000

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

5,000 2004

Consumer spending is under pressure as a result of high household debt and subdued wage growth, albeit real wage growth is, just, in positive territory. Weak productivity will constrain real wage growth with the consequent impact on consumer spending. There are however some positive signs. Offsetting factors are the low pound and a strengthening global economy, where exports may be expected to be higher.

INVBRIEF Property investment market

1.9%

All property total return Q1 2018 (MSCI)

5.5%

All property equivalent yield Q1 2018 (MSCI)

COMMERCIAL PROPERTY Total returns for UK commercial property in the 12 months to March 2018 were 10.0% according to MSCI quarterly data, with the total return reported for Q1 2018 standing at 1.9%. The All Property total return index is now 13.4% above where it was in the period preceding the Brexit vote in June 2016. Commercial property capital growth slowed to 0.8% in Q1 2018, the lowest quarterly capital growth since Q3 2015, as speculation of steeper than expected interest rate rises slowed the rate of capital growth in the sector. Capital growth in the 12 months to March 2018 was 5.1% across the commercial sector. Total returns City and West End office total returns continue their positive run delivering total returns of 7.7% and 7.0% respectively over the 12 months to March 2018. Both West End and City offices have had consecutive periods of positive capital growth with both capital growth indices having made up all the ground lost following the Brexit vote. Retail had a difficult quarter with most regions delivering poor total returns for the quarter, reflecting tough trading conditions and poor spending figures. West End retail was the strongest performing retail market where total returns were 2.7% over the quarter and 12.3% in the 12 months to March 2018. Shopping centres continued their downward trajectory with the seventh consecutive quarter of negative capital growth. The MSCI capital growth index for shopping centres now stands 7.3% lower than it stood in December 2015. Supermarkets were the best performing asset class within this segment delivering 1.8% total return in the quarter and 8.4% over the 12 month period. The industrial sector was the strongest performing sector for the sixth consecutive quarter, delivering total returns of 4.1% over the quarter. The total return over the 12 month period was a remarkable 20.0%, compared to total returns in the office and retail sectors of 8.0% and 6.2% respectively. Capital growth in the industrial sector was the main driver of total return at 14.5% growth over the 12 months to March 2018 driven largely by continuing yield compression.

Page 4 Summer 2018

Standard industrial total returns were 21.2% whilst distribution warehouse delivered total returns of 17.5%. Capital growth in these two asset types has considerably outperformed the rest of the market with standard industrial growing by 15.8% whilst distribution warehouses recorded growth of 11.8% over the 12 months to March 2018. Industrial total returns were strongest in the Eastern region but closely followed by London as both regions posted returns of 5.1% for Q1 2018. Total industrial returns in London were 24.8% in the 12 months to March 2018 as investor appetite for the sector continued to drive capital growth. Total returns in the South East region were 21.0% over the year. Rental growth Commercial property rental growth fell to 2.0% in the 12 months to March 2018 and 0.3% in Q1 2018 according to MSCI quarterly data. This was the lowest quarterly growth rate since Q3 2013. City office rental growth was barely positive in Q1 2018 as the rental growth over the 12 months to March 2018 was just 0.3%. West End office rental growth was slightly stronger at 1.3% over the 12 month period. Industrial rents grew at the fastest rate of all three major sectors, reaching 5.3% over the 12 month period. This compared to the office and retail sectors where rents grew by 1.1% and 0.9% respectively. Industrial rental growth was strongest in London where average rents grew by 7.3% over the 12 month period. The Eastern and South East regions also saw strong rental growth of 6.8% and 6.6% respectively. Rental growth in the standard industrial segment grew at 6.0% and rental growth in the distribution warehouse segment was 3.7%. Standard shops and supermarkets both experienced negative rental growth in Q1 2018 bringing the total rental growth over the 12 months to March 2018 for standard shop to 1.2%. This is the lowest year-onyear rental growth in the sector since March 2014 and is further evidence of the difficulties 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.

Summer 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 the West End over the 12 month period. Several regions have seen negative rental growth in the 12 months to March 2018 with Northern Ireland rents contracting by 1.5%. The East Midlands saw the fastest falling retail rents in England as rents contracted by 0.8% in Q1. Rental growth in the shopping centre segment was 1.2% whilst retail warehouse saw growth of 1.1%.

% 25

Income Return Capital Growth

20

Total Return

15 10 5 0

Distribution warehouses

Standard industrials

South West offices

West End offices

City offices

All offices

Shopping centres

Retail warehouses

Standard shops

-5 All property

Yields Average commercial property equivalent yields in Q1 2018 stood at 5.5% according to 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 earlier. Office yields across the UK fell to 5.7% whilst retail yields fell to 5.5% in Q1 2018.

Fig 5. Annual capital growth by sector Source: MSCI %

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.

Industrial Office

20

Shopping Centres Standard Shop

10

Supermarket Retail

0 -10 -20 -30

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

-40 2003

West End office yields stood at 4.3% at Q1 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.

30

2002

Yields in the standard industrial segment fell by 61 bps to 5.6% over the 12 month period whilst distribution warehouse yields fell by 48 bps to 5.5% over the same period. Regionally, the largest movement in equivalent yields has been seen in Wales, where industrial yields in Q1 2018 stood at 7.3%, down from 8.9% a year earlier. London has also seen strong yield compression with industrial yields standing at 4.8%, down from 5.4%.

INVBRIEF Property investment market

4.5%

FORECASTS Rental growth According to the 2018 Q1 RICS UK Commercial Property Market survey, respondents indicated that the demand for retail space had dropped to its lowest level since 2009. The survey also reported that for the fourth consecutive quarter retail landlords had increased the value of incentive packages in order to entice potential tenants.

Gerald Eve Total Return forecast for 2018

The retail market continues to face acute challenges. The backdrop of rising interest rates and lower growth in employment will likely constrain the growth in household spending. Consumer spending is anticipated to slow down in 2018 before picking up marginally in 2019. The outlook for the retail sector continues to remain fragile as a result of weak consumer demand and restructuring in the sector. Of all the retail segments, we remain relatively sanguine about rental growth for retail warehouses.

“ Given the drawn-out Brexit uncertainty now coupled with potential trade wars, we predict greater than previously anticipated yield softening in the retail and office sectors. ”

Demand for offices remains high, together with relatively low vacancy rates and relatively low availability. Speculative completions in the City and West End will not reduce the supply shortages materially in these submarkets. However, given the limited availability of Grade A product, the short term outlook for rental growth for regional office markets (especially the South East), remains more favourable than for the City and West End markets.

Table 1. Rental growth forecast (%pa) Sector

2018

Ongoing concerns about Brexit and the potential relocation of office staff continues to endure, but there is no evidence of an across-the-board intent to relocate staff overseas. There however is a small risk that a substantially negative outcome of Brexit negotiations may lead to some firms reviewing this position, particularly in the finance sector. The retail sector is expected to deliver the lowest rental growth of the three main sectors, with all three sub-sectors, standard shops, shopping centres and retail warehouses forecast to exhibit negative rental growth in 2018 and 2019. Despite retail warehouse vacancy rates being at the lowest levels since 2001, rental growth has remained weak, as has capital growth. This has largely reflected the view that retail property is being adversely affected by internet shopping, which now accounts for some 15% of retail sales in the UK. The availability of industrial land remains at low levels, as does speculative development, whilst demand remains high. Consequently, we anticipate that standard industrial and distribution warehouses will deliver the highest rental growth figures over the five year forecast period. In 2018 rental growth will be in excess of 3% falling off gradually to slightly over 2% in 2020.

Table 2. Total return forecast (%pa) 2019

2020

Average 2018-22

Standard shops

-1.0

-0.9

0.6

0.2

Shopping centres

-1.5

-1.2

0.2

-0.1

Sector

2018

2019

2020

Average 2018-22

Standard shops

3.0

3.2

4.1

4.0

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

Page 6 Summer 2018

Figures in brackets represent IPF Consensus Forecasts

Summer 2018

Fig 6. Historic and forecast 5yr annualised total return Source: Gerald Eve Research, MSCI

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%.

2018-2022 (forecast)

14 12 10 8 6 4 2

Distribution warehouses

Standard industrials

All offices

South East offices

West End offices

City offices

Retail warehouses

Shopping centres

Standard shops

0

Fig 7. Annual rental growth forecasts Source: Gerald Eve Research, MSCI % 7

2017 (actual)

6

2018

5

2019

4 3 2 1 0 -1

Distribution warehouses

Standard industrials

All offices

South East offices

West End offices

City offices

Retail warehouses

Shopping centres

-2 Standard shops

Investment volumes recorded in 2017 reached some £65bn, with the industrial sector attracting high volumes of capital. The ongoing mix of robust demand for industrial space and restricted supply ensures that standard industrials will be the best performing sector in 2018 and 2019, delivering 10.6% and 7.3% respectively. Over the period 2018-2022 standard industrials are expected to deliver the best performance, averaging annual total returns in the region of 7%.

2013-2017 (actual)

16

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. As previously, we do not currently foresee adverse yield impacts on industrials. Indeed, given the continuing investment attraction of industrials, it is more likely that there will a positive impact on capital values in 2018, potentially carrying through to 2019.

% 18

All Property

Total returns Our base case continues to be for a general softening of yields in the latter part of 2018 for both the office and retail sectors. The impact of reduced economic certainty for financial services firms, especially in the City of London is limited. Whilst businesses would dearly like to have a clearer picture of the potential economic outlook, it remains to be seen if there is a fall-off in office investment. Reflecting the ongoing situation and attendant uncertainty we have revised downwards our total return forecasts for the retail and office sectors for 2019 and 2020.

INVBRIEF Property investment market

“ Investment volumes in the West End are expected to bounce back later in the year. ”

“ Prime rents in the largest regional cities are expected to continue to rise during 2018 and secondary markets are also likely to see upward movement. ”

INVESTMENT & TRANSACTIONS City office investment Following a year of strong investment activity in 2017, trading has been subdued in 2018 with only £1.1bn transacted in Q1 2018, the lowest transaction volume over a quarter since Q3 2016, according to Property Data. However despite this fall in activity, many owners are continuing to market their assets in order to capitalise on the strong overseas demand for the City’s trophy buildings. Whilst new regulations in China have started to impact on demand, the City has received strong interest from South Korea, which accounted for one of the largest deals of 2018 so far. South Korean investors, FG Asset Management, bought Cannon Bridge House from Blackstone for £248m, reflecting a net initial yield (NIY) of 5.2%.

Investment volumes in the West End are expected to bounce back later in the year, largely due to the potential sale of one of the market’s biggest assets, Verde SW1 in Victoria. Agents were appointed to sell the property in March 2018, when it reached full occupancy, with the asking price set at £535m. The property was reported to be under offer in early July for more than £450m, representing a c. 4.5% NIY.

The largest purchase of the quarter came from South Africa, when investor Zeno Capital, paid Evans Randall £400m for Riverbank House, the 320,000 sq ft office building which is the headquarters of hedge fund Man Group.

Likewise, the market could also be boosted with the sales of Marks & Spencer’s head office at 35 North Wharf Road in Paddington, and 20 Soho Square in Soho, which were also put up for sale at the beginning of the year for £250m and £100m, respectively.

However, beyond the headline deals, trading has been fairly quiet. The reduction in the number of transactions partly reflects an aversion to risk in the light of worsening fundamentals and concern over the impact of Brexit on both occupier demand and liquidity. Notably, the average vacancy rate of buildings that have traded over the last 12 months was just 3%, reflecting the current investor preference for prime, well-let buildings. The value-add deals that were so prevalent a couple of years ago have largely dried up, with riskier assets proving a tougher sell in the current climate.

Regional Offices Regional office investment transaction levels in Q1 2018 were relatively subdued compared to the frenetic final quarter of 2017 but the occupational story was much more positive with 1.33m sq ft of take-up; 14% up on the five-year Q1 average.

West End office investment Transaction volumes for West End offices have eased in 2018, with only £212m transacted in the first quarter, a 41% decrease on the previous quarter. However, foreign investors continue to be active, and accounted for the two largest deals of the quarter; Middle Eastern investors bought 119-127 Marylebone Road, from WELPUT for £55m, reflecting a NIY of 4.5%, and Swiss investors, with AFIAA Investment Company, purchased 12 Golden Square from UBS for £52m, reflecting a NIY of 4.0%.

Page 8 Summer 2018

Overseas capital was behind all the major transactions in the year, with investors from Canada, China, Hong Kong, Germany, Norway, Singapore, and the Middle East taking advantage of the weaker pound and snapping up some of the West End’s best assets, some at slight discounts to asking prices.

Prime rents in the largest regional cities are expected to continue their rise during 2018 and secondary rents are also likely to see further upward movement as a result of the shortage of Grade A accommodation and strong investor demand targeting the core provincial centres. Strong leasing activity in the regional markets during recent years has depleted Grade A availability. The development pipeline, in the short term, is below the five year average take-up level for most regional markets. This is expected to fuel rental growth in the regions. The recently agreed and continued roll-out of Government Property Unit (GPU) deals (HMRC Regional Hubs), coupled with moderate levels of speculative development, 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.

Summer 2018

Fig 8. March 2018 vs March 2017 UK equivalent yields Source: MSCI

6.5 6 5.5 5.0

Standard industrials

Distribution warehouses

Standard offices

Office park

Retail warehouses

Supermarkets

Fig 9. Overseas investment in London real estate (12 month rolling average) Source: Property Data % 100

Others

90

Far Eastern

80

Middle Eastern

70

US Other European

60 50

Prime London trophy assets continue to be 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.

0

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%.

Standard shops

Shopping centres

4.5

Retail Prime retail yields have remained relatively stable in Q1 2018 despite total investment transaction volumes being down 47% on Q1 2017 at £1.4bn.

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.

March 2018

7.0

Irish German

40 30 20

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

10

2007

A mix of investors were active in Q1 with West Midlands PF acquiring City Point in Leeds for £26.0m reflecting a 5.8% NIY, Mayfair Capital’s acquisition of 6 Queen Street for £37.2m at a NIY 5.4%, Aviva acquiring Two New Bailey Square for £127.7m and L&G’s acquisition of Atlantic Quay 3 for £56.2m, reflecting a 3.75% NIY.

March 2017

2006

Manchester appears to be top of many investors regional target markets due to a combination of the supply and demand imbalance and the political commitment to the “Northern Powerhouse” gaining credibility and momentum. This has led to Manchester currently having the lowest prime yields in the UK regional cities at 4.75%. With strong investor and occupational demand, as well as continued rental growth, Manchester prime yields could still see further compression.

% 7.5

2005

Q1 2018 GPU occupational transactions include Building 1, Atlantic Square in Glasgow where 187,205 sq ft was secured, along with Three New Bailey in Manchester where 157,000 sq ft was secured.

INVBRIEF Property investment market

“ The UK industrial sector has continued to attract significant levels of capital for both singlelet distribution warehouses and multi-let industrial assets. ”

“ Significant yield compression as institutional investors recognise that the alternative market is one of the few sectors with long index-linked rent... ”

INVESTMENT & TRANSACTIONS (CONTINUED) Shopping centres have seen Q1 2018 transaction volumes (£337m across 11 transactions) fall 9% on Q1 2017. This was notably the lowest level since Q1 2008 (£304m) according to Property Data. This has been driven by the series of retailer administrations seen within the retail market which has continued the negative sentiment towards the sector. Despite this, yields have remained relatively stable. Supermarkets have continued their recovery, driven by the sector offering secure long term income with index-linked reviews. The total value of supermarket transactions recorded a 62% increase for the first quarter of 2018 on a year-on-year comparison. One noteworthy transaction was Invesco’s purchase of Morrison’s supermarket in Colindale from Aberdeen Standard for £43m, reflecting a NIY of 4.6%. Industrial The UK industrial sector has continued to attract significant levels of capital for both single-let distribution warehouses and multi-let industrial assets. Competition for the stock that has come to the market has been fierce and we have seen very competitive bidding on good quality assets. The strength of the occupier market, the ongoing shift to internet retail, rising rents, and moderate levels of speculative development has attracted several investors to the sector and in turn have forced yields to record lows. According to MSCI, distribution warehouse equivalent yields ended 2017 sharper than all UK offices. This marks the first time in over ten years that this has occurred and reflects the levels of pricing being achieved in the market. In certain markets, particularly London, where prime yields are at 4%, yields are significantly sharper than the peak of the previous cycle. With prime yields at levels around 4%, the outlook for values looks set to be supported more by growth in rents rather than significant levels of further positive yield impact over the medium term horizon.

Page 10 Summer 2018

So far in 2018, UK institutions and overseas investors have been particularly acquisitive; by broad purchaser sector, they have been the largest net purchasers of distribution warehouse property. The outlook for industrial pricing is currently divided by competing pressures; on the one hand many investors are targeting the sector, and many are taking an innovative approach to the UK logistics market, focussing on thematic strategies or a particular geography. On the other hand, the outlook for underlying interest rates appears to be less supportive for property pricing and there will be pressure on maintaining these levels of yields. Major distribution warehouse deals concluded during Q1 include Tritax Big Box REIT buying Eddie Stobart’s warehouse in Corby (£81.8m at 5.0% NIY) and Howdens’ warehouse in Warth Park, Raunds (£71.2m at 5.0% NIY). Tritax also purchased a warehouse in Crewe let to Expert Logistics (a subsidiary of AO World) for £36.1m reflecting a 5.4% NIY. Other deals include Legal and General’s purchase of Woodside Industrial Estate in Dunstable (£182.4m at 5.0% NIY) and First Panattoni, a relatively new entrant to the UK market, purchasing a secondary warehouse with development potential in Borehamwood for £53m. In terms of standard industrial investment activity, we recorded the completion of four portfolios over £50m in Q1 2018, which accounted for 27% of all standard industrial investment volumes. These included Blackstone Real Estate and M7 Real Estate’s purchase of The Powerhouse Portfolio for £320m at a NIY of 6.3% and the Magnus Portfolio for £150m at a NIY of 6.4%, and, Warehouse REIT Plc’s purchase of a portfolio of 51 assets for £116m at a NIY of 6.7%. Leisure The last quarter has seen significant yield compression in the investment market as institutional investors recognise that the alternative market is one of the few sectors 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.

Summer 2018

Fig 10. Q1 2018 Acquisitions, Disposals and Net Investment By Investor Type Source: Property Data In the hotel sector, one of the largest acquisitions was the sale of 14 UK hotels from Principal Hotel Group, a Starwood Capital owned company to Foncière des Régions, in a deal worth £858m. In the hotel investment market, yields have compressed to record levels. The two key deals in Q1 were the Travelodge Harrow, recently acquired by Blackrock for a reported NIY of 3.8%, and the acquisition by LaSalle IM of the Travelodge King’s Cross for a reported NIY of 3.1%.

£m 6,000

Sales Acquisitions

4,000

Net Investment

2,000 0 -2,000 -4,000

The leisure activity market has seen continued growth, attracting adults with new competitive socialising concepts. This shows continued positivity in the context of a fitness industry which, across Europe, saw record levels of membership across 2017, jumping 4% from the previous year and totalling £23.3bn.

Others

Occupiers

Private investors

Overseas investors

Private prop co

UK institutions

Quoted prop co

-6,000

The pub sector remains buoyant. In May 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 significant number of portfolio deals in 2017. The Restaurant Group has bought four pubs from the Ribble Valley Inns portfolio, adding to its current 62 sites. Charles Wells also intends to open a 3m litre brewery and visitor centre and pub just outside Bedford having submitted plans on a £13m investment.

Fig 11. Commercial Property Purchases – 12 months to May 2018 Source: Property Data £456m North East

£2,286m West Midlands

£2,336m Scotland £1,000m Wales £3,692m North West

£1,385m East Midland £5,484m South East £2,075m South West £1,963m East of England

£22,108m London

£212m Northern Ireland £1,436m Yorkshire and the Humber

Table 3. Key leisure investment transaction Source: Gerald Eve Property

Location

Tenant

Price

NIY

Manchester Arena

Manchester

Various incl. Manchester City Council and JCDecaux

£102m

5.6%

Travelodge – Kings Cross

London

Travelodge Hotels Ltd

£36.3m

3.1%

Malmaison

York

Malmaison

£44m

4.5%

The Parkway

Bury St Edmunds

Various incl. ASK, Cineworld and Giraffe

£14.1m

5.0%

Walkabout, Broad Street

Birmingham

Intertain (Bars) Ltd

£6m

N/A

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London (City)

Manchester

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Birmingham

Milton Keynes

Jon Ryan-Gill Tel. +44 (0)121 616 4800 [email protected]

Simon Dye Tel. +44 (0)1908 685950 [email protected]

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West Malling

Joseph Funtek Tel. +44 (0)29 2038 8044 [email protected]

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Glasgow Ken Thurtell Tel. +44 (0)141 221 6397 [email protected]

Useful web links Gerald Eve research derives some of its information for the production of Invbrief from the following sources:

Investment agency Lloyd Davies – offices (London) Tel. +44 (0)20 7333 6242 [email protected]

www.bankofengland.co.uk www.ons.gov.uk www.gov.uk/treasury www.gov.uk/beis www.oanda.com www.ipf.org.uk www.msci.com www.propertydata.com www.propertyweek.com

Richard Lines – national Tel. +44 (0)20 7333 6274 [email protected]

Contact details If you require any further details of the facts and figures presented in this publication or would like to discuss them, please contact Alex Vaughan-Jones on +44 (0)20 7333 6375 or [email protected]

John Rodgers – industrial Tel. +44 (0)20 3486 3467 [email protected] Charles Wilford – leisure Tel. +44 (0)20 7333 6804 [email protected] Peter Haigh – hotels Tel. +44 (0)20 7333 6286 [email protected] Michael Riordan – alternative investment Tel. +44 (0)20 7653 6828 [email protected] Richard Moir – specialist Tel. +44 (0)20 7333 6281 [email protected] Callum Robertson – northern England Tel. +44 (0)161 259 0480 [email protected]

Disclaimer & copyright This brochure is a short summary and is not intended to be definitive advice. No responsibility can be accepted for loss or damage caused by reliance on it. © All rights reserved The reproduction of the whole or part of this publication is strictly prohibited without permission from Gerald Eve LLP 06/18

Gerald Eve research We’ve been keeping our clients up to date with the latest investment trends for 20 years. It is a co-ordinated effort by the research team, each of whom has their own area of expertise: Robert Fourt Tel. +44 (0)20 7333 6202 [email protected] Alex Vaughan-Jones Tel. +44 (0)20 7333 6375 [email protected] Steve Sharman Tel. +44 (0)20 7333 6271 ssharman­@geraldeve.com George Matysiak – consultant