Research - 20/10/2011

Investors seek safety in commercial property: Reports UKIT Q3 2011

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Investors bucked market sentiment in quarter three 2011 by transacting £8.06bn, 22% more than the previous quarter, in what is typically the quietest quarter of the year.

These findings come from our quarterly research report, UK Investment Transactions (UKIT) Q3 2011.

Ezra Nahome, CEO, explained: “Commercial property continues to provide attractive returns to investors in comparison to other asset classes and following the Bank of England’s second round of Quantitative Easing, which will support continued low finance costs and stimulate interest in the market, we could witness increased investment activity over the coming 12 months.”

Central London still continues to be market of choice

Investment in the capital in Q3 totalled £3.6bn, nearly half of all the transactions completed in the quarter. In particular Central London offices accounted for 63% of the deals completed, causing the average yield in the sector to remains below 5% - not far off their peak in 2007.

Regional investment focused on quality not quantity

As predicted last quarter, investors have begun to seek opportunities to purchase better quality stock outside of the capital and the south east by acquiring prime office space in the regions.

Ezra said: “The number of deals completed in Q3 in the regions was half the amount completed in Q2. Yet closer examination shows that the volume of money invested remained the same quarter on quarter, clearly demonstrating that investors are focused on quality over quantity in the regions. This activity has led to the Rest of UK Offices recording a 119 basis point inward shift.”

Large deals cause for quarterly upturn

The overall upturn in investment activity has been skewed by a number of large deals taking place; most notably private equity firm Blackstone acquiring a portfolio of hotels across the UK for £600m and the acquisition of the Shell Centre near Waterloo station. This was purchased for £300m by the Canary Wharf Group and Qatari Diar. The investors plan to redevelop the site for a mixed-used office, retail and residential scheme, although this is dependent upon planning permission.

The Blackstone hotel portfolio is an example of the growing popularity of alternative sectors, as investors focus on assets with a good covenant and secure income stream.

Retail sector continued to struggle this quarter

Shopping centres experiencing the biggest outward yield shift of 135 basis points to 8%. This shift can be part explained by a number of deals in more secondary locations, such as Middlesbrough and Barnsley.

Slowdown in traditional sales anticipated

Looking forward to the final quarter of 2011, Ezra concluded: “The underlying concerns over the stability of the UK economy could lead to a slowdown in traditional sales activity in Q4, but we do expect an increase in portfolio and debt sales as banks further downsize their loan books.”

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