Just £7.5bn of property assets changed hands in Q2, plunging by 52.2% on the same quarter last year, according to Lambert Smith Hampton’s latest UK Investment Transactions report.
Researchers at LSH said the Q2 figure was 10% down on an “already subdued” out-turn in Q1 this year, and 41% below the five-year quarterly average.
LSH said the findings represent the first time in more than a decade that the market has experienced a third successive quarter of sub-£10bn volume.
“Lacklustre” investment activity has been driven by ongoing uncertainty over pricing during the quarter, according to the report’s authors.
However, researchers said the number of recorded transactions in Q2 improved by 9% on Q1. That was 36% below a five-year trend.
While none of the key sectors boasted above-average volume in Q2, offices bore the brunt of investor-led caution. Investment volume in the sector dropped to £1.9bn, down by 26% on Q1 and 53% below average.
However, Q2 saw a number of offices change hands at keener yields, with LSH pointing to an increasing investor focus on secure or best-in-class properties. Key examples included CBRE IM’s £73m purchase of Halo, Bristol, from Tesco Pension Fund, reflecting a 5.6% net initial yield; and a Singaporean investor’s £54m purchase of 215 Great Portland Street, W1, (3.9% NIY) from Amsprop Estates.
Industrial boosts volumes
Retail volume fell to £778m, down by 42% on Q1 and marking the weakest out-turn since the height of the pandemic in Q2 2020. Retail warehousing was the best-trading sub-sector in Q2 with £528m volume, which was just 3% below average and boosted by multiple purchases from Realty Income for a combined £270m.
Industrial and logistics saw the strongest volume among core sectors in Q2. Total volume hit £1.9bn in the quarter, rebounding by 44% on Q1 and 20% below the five-year quarterly average. However, LSH said activity was “discernibly thinner” than previous quarters, with volume boosted by the return of sizeable portfolio deals and the largest overall deal in the quarter, namely Blackstone’s £489m acquisition of two distribution parks in Greater Manchester from Harbert and Canmoor.
With investment volumes of £2.6bn, the living sectors were also key to Q2 volume, accounting for 33% of the total and the highest share of the overall market since Q1 2020.
Eight of Q2’s 14 £100m-plus deals involved the living sectors, dominated by build-to-rent and PBSA forward-funding commitments. The largest deal in each sector respectively comprised Starlight Investment’s £225m commitment to three BTR schemes; and Greystar’s £300m commitment to develop a 770-bed PBSA scheme at Wembley Park, London.
Yields move in
Overseas buyers continued to dominate the larger end of the market, with inflows of £4bn in Q2, making up 56% of total volume. Of the key investor categories, international investors were the only net buyer of UK property in Q2 to the tune of £2.1bn, almost doubling from Q1.
While all the main domestic buyer types saw below-trend purchasing in Q2, private propcos were closest to par, with a total volume of £1.6bn – only 13% below average. At £1.2bn, institutional purchasing in Q2 increased by 30%, up from a 15-year low in the previous quarter but 45% below average.
Following three successive quarters of outward movement, the average transaction yield moved in by 19bps in Q2 to stand at 5.73%. Researchers said that reflected a combination of improving price stability and a flight to quality in some parts of the market, particularly offices.
The recent 50bp hike in interest rates came too soon to be reflected in average transaction yields, although sentiment points to a 25bp softening in notional prime yields across all key office segments at the end of Q2.
“Uptick” predicted for Q4
Ezra Nahome, chief executive of LSH, said Q2’s subdued volume was “expected”, but “the fresh knock to sentiment from the latest bout of interest rate hikes will continue to weigh heavily on the market”.
“Pressure on lenders is starting to build and will challenge the banks to hold their nerve or come to the market with consensual sales,” he said.
Nahome (pictured) added that there was a “considerable amount of capital” waiting on the sidelines, which he predicted will “translate into a significant uptick in volume” into Q4.
“The latest rate hikes will impact more selectively on pricing compared with the fallout we saw last autumn,” said Nahome.
“Sectors benefiting from rental growth, such as build-to-rent and industrial, will remain resilient, while bond-like investments and more exposed parts of the market, in particular secondary offices, may see further correction.”
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