One of the UK’s largest ever property deals bolstered Q3 investment volumes amid a relatively quiet quarter, according to Lambert Smith Hampton’s latest UK Investment Transactions (UKIT) report.
£13.5bn of property assets changed hands in Q3, 2% above the five-year quarterly average but marginally below Q2’s £13.9bn. Q3 volume was also somewhat flattered by the prevalence of several major transactions, with the number of recorded deals in the quarter falling 9% below trend and the lowest since Q4 2020.
Blackstone once again demonstrated its ceaseless appetite for UK industrial assets, behind Q3’s largest deal by a distance. The US-based buyer’s £1.7bn (4.0% NIY) sale and leaseback acquisition of the Asda portfolio, comprising 25 distribution units, was the largest industrial deal on record and takes its investment into the UK industrials to a staggering £3.8bn over the past 12 months alone.
The Blackstone deal contributed to another phenomenal quarter for the industrial sector, where Q3 volume of £3.8bn was the second strongest on record. While distribution warehouses continued to dominate, with volume of £2.8bn, strong activity was also seen in the multi-let subsectors during Q3, with South East industrial volume of £464m almost 50% above the quarterly average.
Against a backdrop of insatiable global competition for industrials, the recovery of investment demand for higher yielding retail assets continues apace. Benefitting from a perception of relative value vis-à-vis industrial and trading resilience, a further £787m of retail warehouses changed hands in Q3 following Q2’s four-year high, with headline deals including INVESCO Real Estate’s £84m (NIY 6.41%) acquisition of The Fort Shopping Park, Birmingham and British Land’s £82m purchase of Thurrock Shopping Park (6.00% NIY).
While a cloud of uncertainty surrounds the office sector in the wake of the pandemic, office volume of £4.2bn was relatively robust in the circumstances, standing only 13% below average. Central London office volume of £2.9bn was only 8% below trend, fuelled by ten deals over £100m, the largest being Assicurazioni Generali’s £450m (4.05% NIY) acquisition of Times Square, EC4 from Blackstone. Regional offices was the best performing office segment against trend, however, with Q3 volume of £798m the strongest in two years, underpinned by Regional REIT’s £236m (7.50% NIY) acquisition of Squarestone’s Portfolio of 31 regional office assets.
Elsewhere in the market, Q3 was an exceptional quarter for investment into student accommodation, despite the recent difficulties associated with travel restrictions faced by international students. Volume of £1.3bn in the sector was the third strongest on record and boosted by a number of portfolio deals, the major standout deal being Scape Student Living’s £969m portfolio purchase of 11 sites from GCP Student Living.
Overseas investors remained net buyers of UK property in typical fashion, albeit volume of £6.2bn in Q3 was down 19% on Q2 and 4% below average. North American investors continue to dominate, accounting for 52% of Q3 overseas volume, while investment from the Far East and Middle East continues to be below par in the wake of the pandemic.
While institutional investment remained subdued by conventional standards, with Q3 volume of £1.4bn and net sales of £1.0bn, private propcos have emerged as the most prominent domestic buyers of UK property. On the heels of a strong Q2, private propcos invested a record £2.9bn in Q3 fuelled by the aforementioned Scape Living deal.
The flight to quality apparent in the market was clearly reflected in average pricing during Q3. The All Property average transaction yield moved in by 50bps during Q3 to stand at 5.14%, its lowest level since Q3 2007. The inward movement was driven in part by strong pricing in the industrial sector, where the average yield moved in by 53bps in Q3 to a record low of 4.03%, and Central London Offices, where the average yield moved in by 57bps to 3.87%.
Ezra Nahome, CEO of Lambert Smith Hampton, commented:
“Q3 volume was a touch better than we expected for the summer, albeit largely thanks to a few major deals landing in the quarter. While the pace of economic recovery is slowing and bumpier in light of recent challenges, the relative appeal of UK real estate is undiminished and I remain confident that Q4 will deliver the year’s strongest quarter for volumes.
“The market is in the early stages of a new cycle. With average returns between the key sectors set to converge in the coming years, the winners and losers will be increasingly defined by the quality of product and location over and above simply backing one sector over another.
“As parts of the retail sector exhibit encouraging signs of recovery, the evolution of the office sector is set to be a defining feature of this new cycle, one in which ESG and flexibility will be key. As and when vendors become realistic on pricing for secondary assets, opportunity will abound here to add value and create product which is better suited to post-pandemic demand”.
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