The fourth quarter of 2018 brought an active year for investment to an end, with several deals concluding and contributing to a healthy £2.5 billion of stock transacted across the sectors. Since the beginning of 2019 investment volumes have been lower, caused by a lack of stock coming to the market rather than wholesale negative sentiment towards property. There is still a significant weight of money in the market with an interest in the main property sectors.
The office property sector has seen very little new product coming to the market, however demand remains positive with buyers seeking both long lease, low risk opportunities and also value-add or development opportunities. Focus remains on the core Central Business Districts. Once there is clarity in the Brexit process a significant increase in stock coming to market is anticipated and consequently a quick increase in trading will be seen.
Industrial property sector transactional activity has been limited with very few prime opportunities coming to market in Scotland's principal three cities. Consequently, and buoyed by the strong occupational market, investors have been encouraged to venture into markets previously considered secondary. Activity in 2019 has tended to comprise portfolio sales.
The retail & leisure sector continues to be in a state of flux and further retailer CVAs and administrations are anticipated. Against a backdrop of occupier uncertainty retail property investment markets will likely remain relatively subdued. There does however remain a compelling case for investment in the right retail stock with correct fundamentals. A barrier to activity is the gap between vendor valuations and buyer expectations.
Overall, the delay to the Brexit process is not a welcome development and will likely suppress the level of tranactional activity in 2019. That said, sellers who have been delaying may not be prepared to wait any longer to start marketing. Underlying demand for quality prime stock in Scotland is good and expected to remain that way.
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2019 has seen a continued fall in transactional volumes, largely due to the uncertain economic and political outlook
There remains significant demand for good quality, well let stock and ‘sheds and beds’ continues to be a popular investment strategy to capitalise on the strong occupational markets in these sectors.
Demand for prime office investments in centres such as Birmingham, Manchester, Bristol and Leeds has remained strong in 2019 in particular from overseas investors as occupational markets have remained robust supported particularly by substantial Workspace lettings to WeWork and Regus.
Transaction volumes are down due to lack of stock which has led to a slight softening in prime yields by 25 basis points in Birmingham and Manchester. Bristol is arguably becoming the most sought after office investment location outside London with yields comfortably in the 4’s for prime stock.
Even lower yields can be expected in Oxford and Cambridge but very little product is being traded here. Central London and the South East remains popular albeit to a more overseas buyer base with UK investors wary that a ‘Bad Brexit’ would potentially impact this area the most. Yields remain in the 3% - 4.5% range depending on location and quality.
Added value properties are top of everyone's shopping list but few vendors are selling. If yields on secondary city centre office investments soften, by say 50 basis points, then many unsatisfied investors will buy.
Industrial property remains the most popular sector due to rental growth across the UK regions with prime yields for modern, good quality multi let estates in the North and Midlands stabilising at around 6.5% NIY.
Modern single let distribution centres and industrial units remain in high demand with investors but with an increased spread of yields from 4.5% to 6.5% depending on the quality of building, length of lease and covenant strength. UK institutions and specialist REITS such as Tritax Big Box are buying, although fundamentals have to be strong. In the South East and London, yields for industrial property have been chased lower. Long let prime distribution units with reversion can command yields down into the mid 3’s with a few prime inner London properties having dipped just below 3%.
Scarcity of industrial investments in the market led to direct approaches to vendors by investors. In addition they had been going up the risk curve i.e. older properties, shorter leases and poorer covenants. This trend is currently reversing as Brexit looms and the fundamentals of building quality and financial tenant covenant strength increasingly become more important. The gap between prime and secondary is likely to widen further but there is little forced selling. Vendors are currently playing the waiting game.
In both the office and industrial sectors, demand for sub £3m lots remains very strong as private investors look to build up their portfolio. These investors are less affected by the wait and see the attitude adopted by the professional investment market who stand to lose more should the market move against them.
Retail high street and shopping centres continue to face a number of challenges as they deal with a generational shift from ‘bricks to clicks’, with a backdrop of falling rents and tenant demand resulting in low sales volumes and falling prices. Retail warehousing has also been affected but longer let properties to strong covenants in the larger conurbations have remained popular where investors can see alternative uses in the longer term.
Smaller convenience retail remains popular with private investors, reflecting the higher than industrial yields being offered along with modest rents being paid by tenants and the relative immunity of loss of trade to the internet.
The market for alternative investments in healthcare, student accommodation, residential, hotels, self-storage and car parks has grown significantly in 2019 due to long leases underpinned by strong residual values, both of which appeal to the UK institutional market as leases become shorter and covenants weaker in traditional markets. This trend is here to stay, particularly given the uncertain outlook.