National investment outlook
Economy
UK ANNUAL GDP GROWTH
Source: Oxford Economics
With inflation more under control than in recent quarters, and the Bank of England likely having reached its peak interest rate, forecasts for growth have improved. Oxford Economics estimate that Q4’s annualised GDP growth was 0.2%, and forecast that the UK will now avoid a recession and see annualised growth gradually increase over the year. The latest ONS estimates for GDP growth showed a 0.2% decline in the three months to November 2023 compared to the three months to August.
However, more recent data from the UK composite Purchasing Managers’ Index (PMI) suggests the economy has been growing for the past three months; January’s reading rose to 52.5 from 52.1 in December. A reading of above 50 suggests the economy is expanding.
CPI inflation continues to trend downwards with Q4’s reading at 4.2% according to Oxford Economics, compared to 6.7% in Q3. ONS’ December reading did show a minor rise in CPI from 3.9% to 4.0% which has moderated expectations that the Bank of England could cut rates in the first half of 2024.
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
All but one of the Big Nine cities’ prime yields softened by 25 basis points in Q4 to a weighted average of 6.69%. Bristol was the exception, owing to an exceptionally strong market and transactional evidence keeping its yield the sharpest of the Big Nine at 6.25%. Compared to June, MSCI’s all property and office net initial yields softened by 11 and 23 basis points respectively.
With government 10-year bond yields having sharpened during Q4, the spread between gilts and prime Big Nine offices widened by 113 basis points to 3.15% whilst the gap to MSCI UK offices widened to 1.79%.
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 YR QUARTERLY AVG
MARKET CAP-WEIGHTED PRIME YIELD
INVESTMENT VOLUMES (£M)
Source: Real Capital Analytics, Property Data, Avison Young
Investment transactions totalled £362m across the Big Nine in Q4, improved from Q3 but still 47% below the 10-year Q4 average.
Manchester saw the highest transaction volumes in the quarter, accounting for almost a third of total Big Nine activity. The key deal of the quarter was Menomadin Group’s purchase of One Angel Square for £140m (7.75% NIY). Others included Sterling Property Ventures’ purchase of Mitchells & Butlers’ HQ in Birmingham (£46m / 8.10% NIY) and Parthena Reys’ purchase of One Hardman Boulevard in Manchester (£43m).
Purchases from UK propcos comprised 38% of total transactions over 2023, followed by overseas investors (34%) and UK institutions (20%).
Looking ahead, we expect to see continued steady growth in transaction volumes over 2024. Pricing expectations between buyers and sellers have almost reached equilibrium and buyers are now more confident in pricing stability given the likelihood that interest rates will not go any higher.
Over the coming quarters, cash-rich buyers will be seeking opportunities to buy at lower prices and eventually set a pricing floor. We will also see growth in value-add acquisitions of secondary assets driven by MEES regulations and the changing profile of occupier quality requirements. As such, moderating build costs 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
*NIY from the topped up rental
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 Q4, although slightly improved on Q3 levels. December’s reading showed -11.75% and -16.06% respectively, 6.9 and 6.4 percentage points above September’s levels.
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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