Research - 27/01/2017

Volume rebounds in Q4 as overseas investment in the UK regions hits record level

Lambert Smith Hampton’s quarterly UK Investment Transactions report highlights record overseas regional investment and is optimistic on prospects for activity in 2017.

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A record level of overseas investment in UK regional property was one of the key drivers behind a rebounding market in Q4 2016, according to our UKIT report.

Benefitting from sterling’s devaluation, overseas buyers invested £6bn into UK property, the highest total of any quarter in 2016. While overseas investment in UK property during full year 2016 was down 36% from the high of 2015, overseas buying in the regional markets reached a new annual record of £5.3bn, demonstrating the increasing global appeal of quality single assets outside the capital.

Total investment volumes UK-wide in Q4 2016 totalled £12.8bn, up 31% on Q3’s subdued level and closely in line with the five-year quarterly average. This took the total for the year to £46.5bn, which though down 30% from 2015’s record level is 9% above the ten-year average.

Looking ahead to 2017, LSH forecasts a positive, albeit muted, All Property return in the coming year, with the income returns offset by a 2% fall in capital values. The UKIT report singles out the industrial sector as best placed to outperform the wider market, with a forecast return of 5.7% for the year.

Further highlights in the report include:
  • Institutional investors were net sellers of UK property to the tune of £2.2bn, the highest ever recorded in a single quarter, which reflects the requirement among UK Retail funds to meet redemptions and limited purchasing activity in Q4. 
  • The report also reveals that investment by local authorities continued apace, acquiring £0.6bn of assets during the quarter following a record total in Q3.
  • In Q4, all core sectors recorded increases in volume quarter-on-quarter, but compared to the five-year average offices remained down by 13%. Retail volume was up 9% on the five-year average at £2.9bn, boosted by the largest deal of the quarter, St James Centre in Edinburgh, making it the strongest volume in five quarters.
  • The All Property transaction yield was 5.7% in Q4, identical to Q3’s level and indicative of a stabilisation of average property values in the final three months of the year. 
Ezra Nahome, CEO of LSH, commented: "Q4’s rebound is clear testimony to the ongoing global appeal of UK property. Despite political uncertainty continuing into 2017, both domestically and internationally, the investment fundamentals of UK property auger well over the coming year. With major UK institutions signaling that they are open for business, I am cautiously optimistic that volume in 2017 will surpass 2016’s respectable level.

“While the long-term implications of Brexit are impossible to gauge, uncertainty stemming from last summer’s Referendum is arguably going to support activity over the coming year. Overseas investors, particularly from the Far East, are capitalising on the currency position, while decisive action from the Bank of England is helping to maintain gilt yields at relatively low levels, preserving an attractive yield spread with property for would-be investors.

“In the current climate, driving income performance will be key to maximising returns in 2017. Secure long-income investments will be highly prized by core investors, while asset management initiatives, such as office refurbishments in tightly supplied markets, will continue to offer opportunities for the value-add investor. A detailed understanding of the market dynamics of each locality will be more important than ever.”

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