GVA review of commercial property investment market
20 November 2018Demand for UK commercial property remains strong despite continued lack of clarity over Brexit.
Whilst European investors are becoming risk averse to the UK market because of the uncertainty caused by Brexit, demand from overseas investors, particular from China and the Far East, has strengthened in 2018. Domestic investors have also made a ‘come-back’ to the UK market and have accounted for approx. 12% more acquisitions in 2018, compared to the previous year.
Regardless of political uncertainty, the fundamentals of the UK commercial property market will continue to make it an attractive place to invest and London remains the number one priority target of investors outside of Europe.
However, there is a large divergence between assets, with average industrial yields now significantly below office and retail yields. Investors continue to scale back their retail exposure as the sector continues to struggle from a combination of higher costs associated to increased taxes and input costs as well as the structural shift towards online shopping.
However, there remains a compelling story for industrial investment which is largely driven by strong occupier demand, good income streams, a lack of available standing stock and limitations to speculative development. We expect the downward pressure on yields to continue in 2019, albeit at a slower pace. The appetite for alternatives also remains robust.
In the North East, the lack of availability of investment property is one of the biggest factors affecting growth and there remains strong competition, particularly for prime well let assets. This was demonstrated by the sale of Unit 5 Greenfinch Way, Newburn Riverside where a net initial yield of 6.3% was achieved for a 5 year term certain of government income. Industrial continues to be the sector of choice for investors in the North East.
Significant recent negative publicity and business closures in the retail market has affected investment demand for this sector generally, although retail still accounts for approx. 25% of deals in the North East so far this year. The trend however has moved away from high street shops and moved towards convenience stores, food stores and retail distribution centres. The £120m forward funding acquisition of a 1.4m sq. ft. retail logistics centre at Symmetry Park, Darlington by Tritax Big Box REIT remains the biggest deal so far this year.
Lynsey Underwood, Investment Surveyor at GVA, Newcastle added; “The North East has also benefitted from an increase in demand from investors in the alternative sector, including Student Accommodation, Private Rented Sector (PRS), Healthcare and Leisure. Notable transactions include the sale of Maple & Elm Court in Ashington, comprising residential accommodation, let on a 30 year lease with annual fixed uplifts, to the NHS Foundation Trust, which achieved a NIY of 3.89% in September 2018.”
Overall, the UK commercial property market will remain attractive with the exception of retail. The global weight of money against a limited supply will keep yields low for many assets.
