uk property investment bulletin q3 2016

Dr K A Sieracki KASPAR Associates

UK PROPERTY INVESTMENT BULLETIN Q3 2016

Nothing lasts forever….

Q3 2016 Summary

Q3 2016 investment activity at £8.9bn was 25% down from Q2 2016 and 58%

down from the same time last year. As the year has progressed, transaction

activity has waned.

Overseas investors have taken a larger purchasing share of the UK investment

market at 58% whereas the UK institutions’ share decreased to 14%.

UK institutions were the largest sellers at 31%, followed by UK unlisted property

companies at 15%.

UK institutions had increased their selling share in Q3 2016.

UK institutions were the largest net disinvestors for the second consecutive

quarter.

This is the fifth consecutive quarter of UK institutions net disinvestment which

was the first time of such continuity since Q3 2009 which saw ten consecutive

quarters of UK institutions net disinvestment.

In Q3 2016 the overseas were the sole net investors, the first time since Q2 2013

when the overseas were in the same position.

The largest overseas investor was the US at £1.56bn closely followed by the Far

East at £1.54bn.

The Far East were the largest net overseas investor.

Initial yields for the main sectors continued to be below their long term averages.

For the main sectors, all yields moved out except for offices.

The overall initial yield was 6.26%, up 24bps from Q2 2016.

In the regions, only the North West saw compression.

Both Central London and Outer London saw outward movement of 45bps and

44bps respectively to 4.21% and 5.29%.

Offices continued to be the favourite sector at 30%, followed by Other at 23%.

Central London remained the preferred location at 33.4%, followed by UK wide

at 22%.

Overseas investors remained fans of Central and Outer London.

UK institutions, UK unlisted property companies and UK private investors were

still selling Central London.


Q3 2016

Q3 2016 UK investment activity at £8.9bn was the lowest since Q3 2011.

It was 25% lower than Q2 2016 and 58% lower than the same time last year.

Overseas investors increased their domination of purchasing activity at 57%

(£5.1bn) (Q2 2016 was 45%), followed by UK institutions at 15% (£1.3bn).

These two groups have been the largest investors since Q3 2009 as seen in the

chart below.

The UK institutions’ share decreased further in Q3 at 15% from the 17% share

seen in Q2 2016.

Source: Property Archive

The largest sellers for Q3 2016 were UK institutions at £2.8bn (31%) followed by

overseas at £1.6bn (18%) and UK unlisted property companies at £1.3bn (15%) as

shown in the graph below.

This was increased selling share by the UK institutions from the Q2 2016 level of

27%.



Overseas investors were the only net investor in Q3 2016 at £3.5bn, making it the

30th

consecutive quarter of overseas net investment since Q4 2008 as seen in the

chart below.


UK institutions continued to be the largest net disinvestors at minus £1.5bn for the

second consecutive quarter, followed by UK unlisted property companies at

minus £0.9bn. This was the 14th

consecutive quarter of net disinvestment for UK

unlisted property companies.

The Far East was the largest overseas investor at 34.1% (£1.74bn), followed by

US at 32.7% (£1.66bn).



The biggest overseas seller continued to be the US at 33% (£0.5bn) for the 7th

consecutive quarter, followed by the Scandinavians at 23% (£0.3bn) as illustrated in

the graph below.


The largest net overseas investor in Q3 2016 continued to be the Far East at

£1.7bn for the seventh consecutive quarter as seen in the graph below. The US

followed at £1.14bn, the first time it has been a net investor since Q4 2015.

For the first three quarters of 2016, the Far East has been the largest net investor

at £4.7bn, followed by Others at £1.3bn and the Middle East at £1.2bn.

In Q3 2016 the largest net overseas disinvestor was Europe at minus £0.3bn.

For the first three quarters of 2016, the Irish have been the largest net disinvestors

at minus £0.9bn followed by Europe at minus £0.3bn.

Total Irish net disinvestment has been minus £16.7bn since Q2 2009 making it 30

quarters of continuous net disinvestment.



The average initial yield saw outward movement of 24bps to 6.26% from 6.02%

in Q2 2016 as shown in the chart below. All initial yields for the main sectors

moved out except for offices which slightly compressed by 7bps to 5.58%.

The greatest outward movement was seen for retail warehouses and retail at 65bps

and 61bps respectively (6.67% retail warehouse and 6.39% retail).

All main sector initial yields were still below their respective long term averages.


Average initial yield for Central London moved out by 45bps to 4.21% followed

closely by the average initial yield for Outer London by 44bps to 5.29% as


illustrated in the chart below. All average initial yields by location were still

below their long term average.


The North West average initial yield saw the only compression by 15bps to 6.89%

as shown in the chart below. Scotland saw outward compression of 115bps to

7.5%.


The average lot size for Q3 2016 continued to increase to £31.2m from £29.4m

seen in Q2 2016 as shown in the graph below.



Offices remained the favourite sector at 30%, followed by Other at 23% as shown

in the pie chart below. Other includes motor related, hotels, petrol filling stations,

pubs, student accommodation, nursing homes, medical uses, educational and

residential.


For the first three quarters of 2016, offices remained the favourite at 39%

followed by Other at 17%. Industrial continued to be steady at 9%.



For Q3 2016, UK institutions mainly preferred industrial, retail warehouse and

nursing homes.

Overseas were the main investors in retail, student accommodation, motor related

properties, portfolios, residential and educational.

UK REITs preferred nursing homes, industrial and hotels.

On the sell side, UK institutions mainly sold motor related properties, offices,

retail warehouses, leisure and industrial.

For UK unlisted property companies, it was industrial and retail whereas for UK

private investors it was leisure, pubs, residential and educational. Overseas

investors mainly sold student accommodation and portfolios.

UK institutions were net investors mostly in retail warehouse, industrial and

hotels. Overseas were net investors mostly in retail, shopping centres, motor

related properties, hotels and residential. For UK REITs it was industrial, student

accommodation and hotels.

On the net disinvestment side, the favourites were: for UK institutions it was

offices, motor related properties and retail/office; for UK unlisted property

companies it was retail, industrial, hotels and residential; for UK private investors

it was offices, hotels and residential and for UK REITs it was retail warehouse,

retail and shopping centres.

By location in Q3 2016, Central London continued its popularity run at 33% as

shown in the pie chart below.

UK wide followed at 22% with Outer London at 19%.



For the first three quarters of 2016, Central London remained strong at 35%

followed by UK wide at 18% as illustrated in the pie chart below.

Outer London, South East and the Midlands has a relatively good showing at

11%, 10% and 9% respectively.


Overseas investors remained big fans of Central London and Outer London but

also purchased in Wales, North West and Scotland. UK institutions mainly

purchased in the South East and Yorkshire.


For UK unlisted property companies, purchases were mostly in North East and

Scotland and for UK private investors it was West Midlands and East Anglia.

UK institutions mostly sold in Central London, South West, Wales, North West

and Scotland.

For UK unlisted property companies, the sell locations were East Midlands, East

Anglia and the South East. For UK private investors it was mostly in the South

East.

Net investment for UK institutions was mainly in Outer London and Yorkshire.

For UK REITs it was Central London, Outer London and Yorkshire. For

overseas investors it was Central London, Outer London and North West.

Net disinvestment for UK institutions was Central London, North West, Scotland

and Wales. For UK unlisted property companies, it was Central London, Outer

London, South East and West midlands. For UK private investors it was Central

London.

Key Deals

* £500m - Portfolio of 88 NCP car parks - acquired by Davidson Kempner Capital from

Blackstone & RBS;

* £450m – 6.6% IY – Portfolio of 13 Marks & Spencer stores -

acquired by Fortress Investment Group from Topland Group Plc;

* £430m (circa) portfolio of student accommodation properties –acquired by GIC Real

Estate & GSA from Oaktree Capital;

* £400m -2.4% IY – Debenhams store, Oxford St, W1 - acquired by Ramsbury from

British Land Plc;

* £346m- Portfolio of 26 industrial, office, big box and high street retail properties-

acquired by Goldman Sachs from Alecta.

Looking Forward

Discontinuity exists between the occupier market and the investment market. Tenant

demand will shrink due to technology and low economic growth. Structural change is

upon us as nothing lasts forever. However, the investment market is pricing in robust

rental growth across the board. There is too much capital chasing real estate investment

due to its attractive yield relative to the other asset classes in this world of low interest

rates.


Post BREXIT there will be some tenant demand but there will be too much available

space. Affordability will be key to locking into this tenant demand as well as the type of

spatial configuration. Younger portfolios are most likely to benefit.

The defensive stance to portfolios remains as capital values continue to decline.

DEFINITIONS & METHODOLOGY

SOURCE OF DATA – The data is derived from a wide range of research involving

cross-referencing of information from property press, auction results, agents’ letting and

sales particulars, Land Registry, Company and Fund reports, company websites, press

releases and direct research. The data from 3rd

parties are deemed to be reliable and most

transaction records are confirmed by two or more independent sources. We cannot,

however, guarantee accuracy and the data is subject to future amendments.

TRANSACTIONS – The purchase of a property or a number of properties in a single

transaction such as a shopping centre or an industrial park or a portfolio (see def. below)

of properties. Interests include freehold, long leasehold or virtual freeholds for

investment and owner occupation. With company takeovers, mergers and swaps only

property assets are included.

PRICE – For this exercise transactions acquired for below £1m are not included.

INITIAL YIELD – the initial return on income at purchase as reported by two or more

reliable sources.

RENT PER SQ FT – As reported


ZONE A –As reported

AVERAGE – the arithmetic method as opposed to the Weighted average

DATE – The date of completion as verified by The Land Registry or when the

transaction was reliably reported and confirmed by at least two independent sources.

QUARTER DATES – We have split the data by quarters; 1 January to 31 March, 1

April to 30 June, 1 July to 30 September and 1 October to 31st December.

PROPERTY USES

Offices – Mainly used for Class B1 office use including business parks and Science Parks

with an element of Research and Development space. Buildings which have a significant

proportion of retail space are classified “Retail/Offices” and those that have a significant

proportion of industrial space are classified “Industrial/Offices”

Retail – Use Classes A1, A2 (financial services such as Estate Agents) and A3

(restaurants). Also includes supermarkets and superstores and out of town shopping parks

and factory outlet centres where non –bulky goods are sold predominately

Shopping Centres – Includes regional shopping centres and centres over 20,000sqft but

does not include parades or arcades

Retail Warehouse –Includes usually large units selling bulky non food goods in out of

town parks and standalone units

Industrial – Includes B8 distribution warehouses as well as B2 manufacturing buildings

and Trade Counter Uses and Self Storage

Leisure – Health Clubs, Bingo, Leisure Parks, Cinemas, bowling alleys etc. Please note it

does not include hotels or pubs which are classified separately or restaurants (which are

classified retail)

Mixed – Where there are more than 2 main uses such as a property that comprises retail,

offices, leisure and residential uses

Portfolio – Where two or more distinct properties are bought of more than two sectors.

Where a portfolio comprises buildings of the same uses such as offices the transaction

will be placed under that sector rather than Portfolio

Motor –Related – Usually car showrooms, MOT and tyre and exhaust centres etc. Not

petrol station which are classified separately

Medical Uses – Doctors, Dentists, surgeries etc


Student Accommodation – Primarily residential use for students in buildings held as

investments

Nursery – Care homes and Nursing Homes

INVESTORS

Institutions – Pension funds, property unit trusts, unit trusts, insurance companies etc.

Also UK Government, County and Local Councils.

Property Companies – Non –quoted UK registered companies

PLC Property Companies – Property companies quoted on the London Stock

Exchange, AIM and OFEX

Private Investors – UK based including syndicates and banks and financial institutions

and private equity firms acting for private investors

Owner –Occupiers – Companies that have acquired property primarily for their own

occupation

Joint Ventures and Limited Partnerships – An apportionment will be made between

different types of investor where known

Not Known – There are many transactions where it is difficult to identify the purchaser

since many will be held in offshore registered companies and in subsidiary companies but

we make every effort to identify ownerships through research including the Land

Registry. Where it is not possible to verify ownership we categorise ownership as not

known.

Overseas Investors – This does not include UK based investors who have financial

backing from overseas companies. We have split overseas investor into the most active;

Irish, German, Middle East, European, Scandinavian, USA, Canadian, Israeli, Far

East, Australian, Russian, Indian, South African.

LOCATION

Central London – WC, W1, W2, W6, W8, W11, SW1, SW3, SW6, SW7, SW10, SE1,

NW1, N1, EC1, EC2, EC3, EC4, E14 (Canary Wharf)

Outer London – London Boroughs outside Central London including those in Surrey,

Kent, Essex, Middlesex, Hertfordshire.

South East – Counties (other than those Boroughs in Outer London) of Surrey, Kent,

East Sussex, West Sussex, Essex, Hertfordshire, Buckinghamshire, Berkshire,

Oxfordshire, Hampshire. Also Channel Islands.


South West – Dorset, Devon, Cornwall, Wiltshire, Somerset, Bristol

West Midlands – Birmingham, Warwickshire, Herefordshire, Worcestershire,

Shropshire, Staffordshire, Gloucestershire

East Midlands – Northamptonshire, Leicestershire, Nottinghamshire, Derbyshire,

Bedfordshire

East Anglia – Suffolk, Norfolk, Cambridgeshire, Lincolnshire

Wales

Scotland

North West – Manchester, Liverpool, Lancashire, Cheshire, Cumbria. Also Isle of Man

Yorkshire

North East – Newcastle, Durham, Tyneside, Northumberland

Northern Ireland

uk property investment bulletin q3 2016

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