Research - 29/01/2019

UKIT Q4 2018: Brexit to weigh on Q1 volume

Healthy volume of £16.8bn in Q4 propelled the total for 2018 to £61.8bn, the second strongest year in a decade.

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A strong quarter

Q4’s volume was only 3% down on Q3’s impressive total and 12% above the five-year quarterly average. Characterised by a markedly stronger send half to the year, £61.8bn of assets changed hands in 2018 as a whole, the second strongest year this decade. Volume was boosted by Permodalan Nasional Berhad and The Employees Provident Fund of Malaysia’s £ 1.58bn acquisition of Battersea Power Station. This was the largest single property deal in the UK since Q4 2013 and the fourth largest in history. 

Focus on quality

The All Property average transaction yield moved in by 32 bps to 5.34% during Q4, its lowest level since Q4 2007 and the sharpest quarter-on-quarter shift in average prices in over four years. The movement reflects an investor focus on secure, quality assets amid elevated levels of uncertainty over the near term outlook.

The polarisation of fortunes between retail and industrial has become entrenched.  Despite value being ever harder to find, unwavering demand for industrial and logistics continues unabated. The sector saw record quarterly volume of £2.3bn in Q4, taking 2018 volume to a new annual record of £8.4bn. On the flipside, retail volume of £1.45bn in Q4 was at its lowest since Q1 2012, while the average transaction yield in the sector contracted to a 12-year low of 5.54%, reflecting strong aversion to occupational risk.

The beast from the Far East 

Despite the ongoing uncertainty over the UK’s future relationship with the EU, overseas investors continue to show faith in the core fundamentals of UK real estate while taking advantage of the favourable exchange rate. At £8.1bn, Q4 overseas investment was 15% above the five-year quarterly average, and dominated by Far Eastern buyers who invested a record £4.8bn in the quarter.

Ezra Nahome, CEO of Lambert Smith Hampton, commented: 

“Viewed in the current context, Q4’s healthy volume is a timely reminder of just how resilient UK real estate is proving to be in spite of all the political toing and froing. This is particularly true from overseas, where the current uncertain environment could be seen by many as a buying opportunity.

“That said, the wider market is likely to be relatively subdued in Q1 as domestic and smaller lot-size investors opt to sit on their hands and await greater clarity on the timing and manner of the UK’s exit from the EU. I am nonetheless upbeat about 2019, with volumes bouncing back in the second half of the year. We are largely ruling out the prospect of further yield compression in 2019, meaning investors will be especially focused on strategies aimed at maximising income and capital growth.

“Amid all this uncertainty, one thing we can be sure of is that the weight of money targeting secure income will be unwavering in 2019. This will drive continuing demand in alternatives, most notably PRS where a multitude of investors are allocating capital. Whilst retail has endured a torrid year in 2018, quality retail units in proven locations are now offering relative value, particularly set against industrial, and are likely to attract yield-seeking investors over the coming year.”

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