National investment outlook
Economy
UK ANNUAL GDP GROWTH
Source: Oxford Economics
With inflation back to the 2% target in June, the Bank of England is now pivoting from fighting inflation to supporting the economy, as shown by the Base Rate cut of 25 bps seen in August. Encouragingly, Oxford Economics are predicting that q-on-q GDP growth in the year to June 2024 will reach 0.8%, up from 0.3% in the year to March; then accelerate further to 1.2% in the year to September. The election of a new UK government in July, with a large majority, means the economy faces a stable policy environment that will allow businesses to plan for the long-term.
The latest UK composite Purchasing Managers’ Index (PMI) suggests the economy’s rate of growth has seen robust in recent months. July’s reading rose to 52.7 from 52.3 in June. A reading of above 50 suggests the economy is expanding.
One concern has been the recent signs that the labour market has cooled, with the unemployment rate reaching 4.4% in May 2024, up from 4.0% in January. Also, job vacancies have been on a downwards trajectory for many months now. However, a 4.4% unemployment rate is low compared to previous downturns – in the post-GFC austerity years, the UK unemployment rate reached at 8.5% in November 2011.
UK ANNUAL CPI GROWTH
Source: Oxford Economics
UK PEOPLE IN EMPLOYMENT
Source: Oxford Economics
Yields
ASSET YIELDS (%)
Source: Bank of England, Macrobond, MSCI, Avison Young
The prime yields of all Big Nine cities in Q2 had a weighted average of 6.94%, which is unchanged from last quarter. Compared to March, MSCI’s all property yield has remained unchanged at 5.56% and office net initial yields softened by 23 basis points.
With the decrease in 10-year government bond yields, the spread between gilts and prime Big Nine offices narrowed by 29 basis points to 2.73% whilst the gap to MSCI UK offices narrowed by 43 basis points to 1.01%.
PRIME YIELDS
Source: Avison Young
YIELD SPREAD TO 10-YEAR GILT (%)
Source: Macrobond, MSCI, Avison Young. Avison Young analysis
Transactions
TOTAL INVESTMENT VOLUMES
CHANGE ON LAST QUARTER
CHANGE ON 10 YEAR QUARTERLY AVG
BIG NINE AVERAGE PRIME YIELD
INVESTMENT VOLUMES (£M)
Source: Real Capital Analytics, Property Data, Avison Young
Investment transactions totalled £172m across the Big Nine in Q2, down by 47% on Q1 and 72% below the 10-year Q2 average.
Glasgow saw the greatest transaction volumes, accounting for 40% of the whole Big nine. The key deals of the quarter were at 1 West Regent Street (Glasgow), 120 Redcliff Quay (Bristol) and 40 Torphichen Street (Edinburgh).
Purchases from overseas investors comprised 35.9% of total transactions over the past 12 months, followed by UK PropCos (17.4%).
Looking ahead, we believe the recent cut in the Base Rate and signs the economy is strengthening may encourage more investors to consider re-entering the market, which bodes well for transaction volumes over the next 18 months. Pricing expectations between buyers and sellers are evolving towards equilibrium, with buyers now mulling the possibility that a turning point for the market may only be a few months away, at least for prime and well-located assets.
Over the coming quarters, we expect to see dealmaking driven by refinancing events and cash-rich buyers will be seeking opportunities to buy at lower prices. We will also see growth coming for value-add acquisitions of secondary assets driven by MEES regulations and the changing profile of occupier quality requirements. Moderating construction costs, plus a shortage of genuine grade A space, are making refurbishment opportunities more attractive.
INVESTMENT VOLUMES 12 MONTH ROLLING
Source: Real Capital Analytics, Avison Young
INVESTMENT VOLUMES BY CITY (£M)
Source: Real Capital Analytics, Avison Young
INVESTMENT BY BUYER TYPE, LAST 12 MONTHS
Source: Real Capital Analytics, Avison Young
NOTABLE TRANSACTIONS
Source: Real Capital Analytics, Avison Young
Market performance
REGIONAL OFFICES PERFORMANCE
Source: MSCI
Total returns and capital growth in MSCI’s UK offices index remained in negative territory throughout Q2, although each saw encouraging increases of 227 and 207 basis points respectively.
IPF CONSENSUS FORECASTS
Source: Investment Property Forum, November 2022
London/European Insight
INSIGHT
Investment volumes in London have fallen -75% from last quarter to £ now XX below the 10-year average. Prime city core yields softened 50bps to 4.75%.
Continental Europe’s major markets have also seen significant turbulence. Transaction volumes are down 25% compared to 2021, the steepest annual drop since 2009, according to MSCI.
The number of active buyers and sellers in the markets across Europe are at their lowest levels since 2013. This withdrawal has been driven mostly by the domestic market, while cross-border transactions reached a four-year high. We therefore anticipate overseas buyers to again play a significant role in the UK’s regional office market in 2023.
MSCI INDICATORS
Source: MSCI
INSIGHT
Investment volumes in London have fallen -75% from last quarter to £ now XX below the 10-year average. Prime city core yields softened 50bps to 4.75%.
Continental Europe’s major markets have also seen significant turbulence. Transaction volumes are down 25% compared to 2021, the steepest annual drop since 2009, according to MSCI.
The number of active buyers and sellers in the markets across Europe are at their lowest levels since 2013. This withdrawal has been driven mostly by the domestic market, while cross-border transactions reached a four-year high. We therefore anticipate overseas buyers to again play a significant role in the UK’s regional office market in 2023.
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