National investment outlook
Economy
UK ANNUAL GDP GROWTH
Source: Oxford Economics
The Bank of England continues to prioritise supporting growth over inflation, announcing a 25 bps base rate cut in November 2024 and more recently a further 25 bps cut in February 2025 to 4.5%, its lowest level since June 2023. However, financial markets have been volatile in recent months, due to concerns over the possible impact on global inflation of the new Trump White House’s plans on tariffs. January 2025 was a rapidly changing month for bonds, with the 10-year gilt yield rising from 4.55% on 1st January to 4.86% on 14th January; then declining to 4.58% on 28th January.
The latest UK composite Purchasing Managers’ Index (PMI) suggests business activity has been sluggish. January’s reading was 50.9, up from 50.4 in December. A reading of above 50 suggests the economy is expanding, so the index is pointing to marginal growth for firms.
Recent data confirmed we are seeing a modest slowdown in the labour market. While the unemployment rate is relatively low at 4.3%, the number of job vacancies has continued to decline. There is growing evidence that measures announced in the autumn 2024 Budget, such the hike in employers’ National Insurance Contributions, have had a dampening effect on demand for workers.
The Q3 2024 GDP figures showed the UK economy flatlined on a quarter-on-quarter comparison, down from 0.4% growth in Q2. The monthly GDP figures reported output grew by 0.1% month-on-month in November, up from -0.1% in October.
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
Prime yields for all Big Nine cities in Q4 had a weighted average of 7.14%, which is unchanged from Q3. MSCI’s all property yield moved in by 55 bps in Q4 ending the year at 5.33%.
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
£490 million of office assets transacted across the Big Nine markets in Q4 2024, despite this being 22% below the 10-year quarterly average, encouragingly, this is the highest quarterly total since Q2 2022. This end of year boost brings annual 2024 volumes to £1.3bn, 21% ahead of 2023 levels and 48% below the long term annual average of £2.5bn.
Bolstered by Melford Capital’s acquisition of Bristol EQ for £103m, Bristol saw the greatest transaction volumes, accounting for 32% of Big Nine investment sales. Other key regional deals of the quarter include Ashtrom Properties £78m purchase of Wellington Street, Leeds and GoldenTree Asset Management’s £38m acquisition of 54 Hagley Road, Birmingham which was acquired as part of a portfolio.
Purchases from UK propcos comprised of 27% of total transactions, up on the long term average share of 23%. Overseas investors accounted for 25% share of 2024 volumes, on average this purchaser type makes up a 34% share.
With greater clarity regarding the direction and pace of interest rate movements over the next 12 months, the ‘wait and see’ approach adopted by some investors over the last 18 months is already starting to wane. Of course, challenges do remain, a low growth economy and volatile financial markets, however, an uptick in RTO policies, more realistic valuations, strong leasing activity and subsequent robust levels of rental growth should underpin the case for increased office investment in 2025.
Prime and well-located assets will remain top of the shopping list but for those with a greater appetite for risk, acquisitions of secondary assets and value-add opportunities are now in focus. The trend towards reducing embodied carbon and high development costs will drive growth in retrofitting, refurbishment and change of use opportunities of secondary properties across the UK regional cities.
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 falls slowed significantly in Q4. MSCI’s 12-month total return stood at -1.64% and capital growth stood at -6.65% in December’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.
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