National investment outlook
Economy
UK ANNUAL GDP GROWTH
Source: Oxford Economics
The Bank of England has now pivoted from fighting inflation (which at 1.7% in September is below the Bank of England’s 2.0% target) to supporting growth by cutting the Base Rate in August and November, although gilt yields ticked up again following the government’s autumn Budget.
The latest UK composite Purchasing Managers’ Index (PMI) suggests business activity has slowed slightly but remains in positive territory. October’s reading declined to 51.8, down from 52.6 in September. A reading of above 50 suggests the economy is expanding.
Labour market data in recent months has painted a mixed picture. While the unemployment rate is relatively low at 4.0%, the number of job vacancies has continued to decline. There are concerns that measures announced in the autumn Budget, such the hike in employers’ National Insurance Contributions, could further slow the jobs market.
The latest GDP figures show the Professional, Scientific and Technical and Information and Communications sectors, which are major office occupiers, are seeing robust growth. Encouragingly, Oxford Economics are predicting that q-on-q GDP growth in the year to September 2024 will reach 1.1%, up from 0.7% in the year to June. GDP growth is then forecast to accelerate further to 1.9% in the year to December.
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 for all Big Nine cities in Q3 reached a weighted average of 7.11%, after remaining unchanged since January 2024 at 6.94%. Compared to June, MSCI’s all property yield has decreased to 5.45% and office net initial yields softened by 12 basis points. With the increase in the 10-year government bond yields, the spread between gilts and the prime Big nine office widened by 38 basis points to 3.11%, whilst the gap to MSCI UK offices widened by 9 basis points to 1.10%.
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
£368 million of office assets transacted across the Big Nine markets in Q3 2024, which was double the Q2 volume at £171.8 million and 38% below the 10-year average.
Manchester saw the greatest transaction volumes, accounting for 37% of the whole Big Nine. The key deals of the quarter were Tachbrook Park Drive(Birmingham), 20 West Register Street( Edinburgh) and 220 High Street(Glasgow).
Purchases from UK propcos comprised of 27% of total transactions, followed by Overseas Investors at 21% and UK Institutions at 7%.
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 months away, at least for prime and well-located assets.
Over the coming quarters we will see further price discovery and evidence of the widening yield gap between prime and the rest, we expect to see increased event driven activity, driven by refinancing events and cash-rich buyers capitalising on increased engagement at opportunistic pricing. 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. The lack of new grade A space and evidence of above trend growth for best in class product will tempt those with conviction to press ahead with repositioning opportunities.
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 Q3,currently at -6.35% and -11.16% respectively in September’s reading.
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.
This report has been prepared by Avison Young for general information purposes only. Whilst Avison Young endeavours to ensure that the information in this report is correct it does not warrant completeness or accuracy. You should not rely on it without seeking professional advice. Avison Young assumes no responsibility for errors or omissions in this publication or other documents which are referenced by or linked to this report. To the maximum extent permitted by law and without limitation Avison Young excludes all representations, warranties and conditions relating to this report and the use of this report. All intellectual property rights are reserved and prior written permission is required from Avison Young to reproduce material contained in this report.