Capital Markets

55 Colmore Row

Further Uncertainty for Real Estate Markets

If the continued uncertainty surrounding Brexit wasn’t enough, COVID-19 has proven to be a huge spanner in the works of the UK commercial property investment market.

Prior to the onset of the virus in the UK, a number of open ended property funds experienced significant outflows, largely due to levels of exposure to retail assets. As the virus took hold, on 18th March, trading was suspended for 80% of UK open ended property funds. This suspension was imposed due to the resultant material uncertainty in asset valuations.

The material uncertainty has now been removed for certain property asset classes including: long dated annuity income, Build to Rent (BTR), all logistics and industrial property and now Central London offices.

The fund suspension and current levels of co-operation and support being provided by banks, has resulted in very few transactions in Q2.

Key Regional Capital Market Transactions

Record Fall in Transactional Volumes

Just £3.7bn of investment sales were concluded in H1 2020 across the UK, a 64% fall compared with the same period in 2019, according to stats produced by Property Data. This represents the biggest fall in transactional levels since records began, as the market has been crippled by the ongoing pandemic.

Across the Midlands for the same period, transactional volumes are reduced by 72% for offices and 71% industrial & logistics. Headline investment deals in the industrial & logistics sector included Ares’ acquisition of the Topps Tiles HQ in Leicester for £18.1m, 6.2% NIY and Kennedy Wilson’s acquisition of the KAB Seating premises in Northampton for £15m, 7.85% NIY.

Midlands H1 2019 v's H1 2020

Knight Frank have experienced encouraging signs for the market in recent weeks and are expecting increased levels of transactional activity during Q3, as supressed demand for UK property starts to come through.

Record Take-Up for Industrial & Logistics Sector in H1 2020

The reduced transactional volumes during H1 were in stark contrast to the levels of occupier take-up experienced in the industrial & logistics sector. Increased levels of demand from online retailers in addition to short term space requirements are expected to have resulted in record take-up across the UK during H1, with ONS data showing online sales accounted for 33% of all retail spend during Q2 2020.

Across the Midlands, Knight Frank data shows take-up for units >50,000 sq ft during H1 2020 of 4,386,000 sq ft, with 85% of that take-up (3,721,116 sq ft) having completed during Q2.

Midlands Industrial & Logistics Take-up (sq ft)

KF Capital Markets Comment

We are already starting to experience increased levels of off-market price exploration and activity. A number of well capitalised buyers are seeing the current lull as a good opportunity to buy with less competition and, in some instances, at discounted pricing. We are aware of a number of key players targeting sizeable lots in key regional cities, with Birmingham remaining towards the top of that list.

As uncertainty reduces and levels of investor appetite increase, we would anticipate a significant uptick in activity during Q3 & Q4.

UK Office Investment Volumes – Q2 2020