An analysis of the commercial property portfolio market reveals activity returned in the latter half of 2017, driving the market towards pre-Brexit levels. This year, we are likely to see demand continue but in an uncertain political climate, where are the opportunities?
Despite fraught Brexit negotiations and the on-going uncertainty surrounding the future of the current Government, the UK property portfolio market proved largely resilient in 2017. Following initial jitters in the wake of the UK’s decision to leave the European Union in 2016, confidence returned to the market, with portfolio transaction volumes up 75% last year, according to market analysis conducted by Allsop.
Market volume exceeded medium and long-term averages, with total transactions in 2017 reaching over £14.5bn.
Portfolio transactions in the autumn last year accounted for 44% of the entire market, following an extremely busy summer, driven by renewed demand from institutional investors.
Last year we saw the market buoyed by significant levels of overseas investment, largely due to currency fluctuations and the attractive market fundamentals that underpin the commercial sector. These levels are anticipated to be sustained throughout 2018 but with changes to CGT for overseas investors in the commercial sector, due to come in next year; we could see these high levels taper off in 2019. Albeit, this could trigger a source of stock in 2018!
Throughout the year we witnessed a flight to high quality investments providing secure long-term income. Our market analysis revealed strong demand for primary and good quality secondary portfolios, and particularly so for specific industrial and office packages; which continue to be highly sought-after. We have witnessed ‘first-hand’ significant competitive tension on portfolios recently marketed from a diverse range of purchaser types.
Our research revealed an increase in demand for industrial and alternative asset classes in 2017. Single sector industrial portfolio transactions accounted for 33% of the market share last year, the highest level in over 10 years and more than three times the 10-year average.
Limited development, increased construction costs and the redevelopment of industrial to higher value uses, such as residential, has constrained supply within industrial and logistics markets. Demand for logistics and distribution centres to meet the country’s growth in online retail sales, continued to place pressure on supply. With limited potential for further yield compression (now 3.5% for best in class), we expect to see income growth continue to drive demand in 2018.
- Having shrugged off the January blues, we are already seeing a healthy level of industrial portfolios coming to the market and we are in no doubt it will continue to be highly sought-after in the coming months. However, diminishing returns are looming and one must ask the question, where is the grass greener?
- Retail warehousing is well placed to become the stand out portfolio asset class of 2018 with the relatively limited recent supply of portfolios brought to the market now offering increasingly attractive value for money. Use class market share is below the 3, 5 and 10-year averages and accounted for only 11% of portfolio transactions in 2017. Well located parks have continued to show strong rental growth prospects and we expect to see renewed interest from UK institutions and property companies chasing both long-term income and value-add portfolios. That said, concerns more recently have emerged on the performance of several national retailers struggling under financial pressure; watch this space.
- Shopping centre portfolios remain an attractive prospect for the brave investor, given the high yield returns available (c.10%). A recent cooling in the retail sector, as a whole, has fuelled a price adjustment which is expected to continue in 2018. Demand remains robust, in particular for well-located value-add portfolios, at the right price.
- Convenience led retail remains attractive benefiting from a degree of insulation to issues on the High Street; we have already seen several national multiples struggle this year as e-commerce becomes ever more popular.
- Office portfolios look good value at present in comparison to other sectors. Long income portfolios weighted to the South of England close to key public infrastructure or with underlying alternative use potential are particularly sought after.
- Following a significant decline in purchasing power last year, UK institutions are firmly back in the market with a significant level of active requirements in Q1 2018. Large portfolio lot sizes are returning to the market as evidenced by the recent sale of the £150m Industrial Magnus Portfolio and £320m Infrared Industrial Portfolio which are expected to boost 2018 total transaction volume.
Regardless of the outcome of the latest round of Brexit talks, there is appetite among bold investors who see will see opportunity amidst the Brexit turmoil in 2018.
Notes to editor
Tom Dales is a chartered commercial investment surveyor working in the national investment team.
The posts on this blog are provided ‘as is’ with no warranties and confer no rights. The opinions expressed are the author’s own and do not necessarily represent those of their employer.
If you would like to get in touch with Tom, please contact him:
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