Investment market in brief
Investment activity was markedly improved in Q3 2020 compared to the previous quarter, both in terms of volume and number of deals. Volumes increased to £1.2 billion from £682 million in Q2 but remained 67% down on the 10-year quarterly average. The relaxation of some restrictions during the summer provided only partial relief to investors with restrictions on travel, reignited Brexit negotiations and a typical summer lull continuing to have an impact. Furthermore, The RICS only lifted their Material Uncertainty Clause in July.
Whilst there is a dearth of activity, we remain well above the levels seen during the bottoms of the cycle in the dot com crash and the GFC when volumes were £777 million and £840 million respectively. Furthermore, there is little upward pressure on prime yields as of yet with London remaining well priced compared to many of its European counterparts.
ANY MORE FOR CORE?
The material uncertainty that plagued Q2 of 2020 has pushed investors to become more risk-averse, favouring quality stock typically at the core end of the market. The majority of properties transacted in this bracket have achieved pre-Covid or similar pricing. Transactional evidence for this includes The Cabot, 25 Cabot Square, E14, which sold for £380 million; 1 New Oxford Street, WC1, that exchanged for £174 million; and 7 Soho Square, W1, going for £78 million.
On a month-by-month basis across the quarter, July was by far the busiest month, recording 72% of Q3 investment volumes and 54% of transactions. This may be reflective of the release of some pent-up demand which accrued during the Q2 restrictions which impeded valuations and site visits for investors, particularly those from outside of the UK.
Nevertheless, activity continues to be dominated by overseas investors who accounted for 78% of the total investment volume for the quarter. While the majority of overseas capital was contributed from Asia at 48% of the quarterly total by volume - including the two largest deals of the quarter - over half of overseas investors by number were based in mainland Europe. Purchases made from this region include the Wellington Block, WC2 by Dutch firm APG for £76.5 million and 8-12 Warwick Lane, EC4 by a private Danish investor for £44 million.
By vendor, the US reported the greatest release of assets at £613 million that was 53% of the quarterly total. The UK sold the most in terms of numbers of transactions, tallying 13 across the quarter.
There has been some interest in seeking out value-add opportunities, typically focusing on the smaller end of the market, with UK investors being the primary drivers. In the current risk-averse climate, larger value-add stock or buildings with a significant letting risk posed by periphery locations or aspirational pricing continue to struggle to attract substantial interest.
Central banks across the globe have moved to lower interest rates in an effort to get money moving – a trend which is expected to remain for some time. Consequently, debt is relatively inexpensive for those who can access it. However, many lenders are requiring increased assurances on risk, with the uncertain economic backdrop being heightened by significant perceived structural shifts. Investors looking to borrow may therefore face increased scrutiny when purchasing even traditionally high-security assets.
INTO THE LOOKING GLASS
Demand is expected to pick up in the final quarter of 2020, with significant headline deals already eclipsing Q3 volumes. In October so far, there have been several high value transactions including One London Wall Place, EC2, at £480 million; Nova, SW1, where Suntec REIT purchased a 50% stake for £431 million; and Chanel’s purchase of their HQ, 159 New Bond Street, W1, for £310 million – a step above the reported £240 million asking price.
There remains a growing weight of supply and demand – both of which have been held up by the pandemic. The resolve at the core end of market will become clearer with properties like 66 Shoe Lane, EC4 and New Ludgate, EC4 reaching advanced stages of negotiation and The Scalpel, EC3 and 100 Bishopsgate, EC3 set to test the record yields set for City towers in 2017 once again.
Additional reassurances of the current and future strength in the market can be found in the volume of prime stock that is presently under offer. Deka has placed an offer to purchase British Land’s Clarges Estate in Mayfair, W1, for £180 million. This is one of several assets that British Land is looking to sell off in order to focus on campus developments in London, with some £4 billion worth of assets expected to be disposed of in the medium-term. Elsewhere, 16-17 Connaught Place, W2, is under offer from the Italian pension fund ENPAM; GLL have placed an offer on Yalding House, W1; and Morgan Capital Partners have reportedly produced an offer for Kirby Street, EC1.
Several of the recently completed and potential transactions have provided a return of best bids which can be taken as a sign of buoyancy in the market. These have also revealed strong competitive tensions on top tier properties including 1 St James’s Square and 64 St James’s Street in SW1 along with 7 Newgate Street, EC1 and 100 Fetter Lane, EC4 among others.
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