25
Soaring investment in the regions in Q4 caps surprisingly strong year UK Commercial Property Investment Review 2017 £62.1 BILLION IN 2017
1Investment Review 2017
Soaring investment in the regions in Q4 caps surprisingly strong year
UK Commercial Property Investment Review 2017
£62.1 BILLION IN 2017
2Investment Review 2017Table of Contents
Every effort has been made to ensure the accuracy of the information held within this report. The publisher cannot accept liability for any loss/damage which may arise as a result of any error or omission of any data. Any data reproduced from this analysis must be accredited to CoStar.
Overview ........................................................3
Key Infographics ..............................................4
Key Investment Deals in 2017 .............................5
By Sector .........................................................6
By Region .......................................................8
Sources of Capital ...........................................9
Yields .............................................................11
CoStar Repeat-Sale Indices ................................12
Best Performing Markets ...................................14
Occupier Market Conditions: National Offices ......16
Occupier Market Conditions: National Industrial ...17
Outlook for 2018 ................................................18
Q4 2017 League Tables: Investment Agents .............20
2017 Annual League Tables: Investment Agents .......22
Data, Analytics & News Have Come Together .........24
Get in Touch with CoStar.............................................25
The figures in this report are based on all UK commercial property deals that have completed (not exchanged/under offer) during the relevant quarterly period. The deal data is collated by our dedicated invest-ment research team who endeavour to speak to all investment agents, investors, and other involved parties ensuring the widest possible engagement and most representative figures. All deals are for UK-based commercial properties including alternative classes such as student accommodation, hospitality, and Build-to-Rent.
The figures exclude all debt transactions, refinancing, auction deals, and business acquisitions. All deals submitted are added to the CoStar database for clients to view at a granular level and also run powerful, real-time analytics on, with the exception of any confidential deals submitted in confidence for aggregation purposes. With over 100 ded-icated researchers, the unrivalled size of CoStar’s research operation means that we have the ability to collect more deals/data than any other UK commercial property information provider.
Overview
Mark Stansfield Managing Analyst
Source: CoStar Group
01020304050607080
2010 2011 2012 2013 2014 2015 2016 2017
Q1 Q2 Q3 Q4
Well, that turned out better than expected.
Robust demand for regional assets led to another strong quarter for UK commercial property investment in Q4 2017, which rounded off a surprisingly strong year.
At £18.9bn, volumes in Q4 2017 were up 18% compared to Q4 2016. It brought total spending in 2017 up to £62.1bn, a 27% increase from 2016 and just 8% below the 2015 figure. The number of deals soared above 5,000. This better-than-expected total was underpinned by strong occupier market fundamentals. However, it is not a uniformly positive picture across the country: this report picks out the winners and losers at a market/sector level.
Key themes over the year included a big rise in regional investment (which accelerated in Q4), the enduring popularity of the industrial and student accommodation sectors, a rise in
domestic investment (it was another record year for spending by local authorities), and a widening yield gap between prime and secondary property.
Huge London deals continued to grab the headlines, most notably the £1bn-plus sales of the Leadenhall Building and 20 Fenchurch Street to Hong Kong investors. But such landmark deals helped to mask a decline in deal frequency in the capital. Indeed, the number of Central London office sales in 2017 fell to its lowest level in a decade.
So how will UK commercial property fare in 2018? Will investors continue to focus on prime, well-let property or feel confident enough to take on more asset management opportunities? Can yields go any lower given the likely upward movement of interest rates? Will global capital continue to flood into London? In an ever-changing climate, expect more surprises in 2018.
UK Commercial Property Investment Volume (£bn)
£62.1BN SPENT 27% INCREASE FROM 2016 OVER 5,000 DEALS DONE REGIONS ON THE RISE STUDENT HOUSING STANDS OUT INDUSTRIAL POPULAR BIG SIX OFFICES IN DEMAND RETAIL IN DECLINE RETAIL WAREHOUSES RESILIENT U.S. NET SELLERS CHINA/HK SPENT RECORD £8.2BN LONDON TROPHIES POPULAR LONDON DEAL FREQUENCY DOWN LOCAL AUTHORITIES PILE IN DOMESTIC INVESTMENT UP 25% Y-O-Y PRIME V SECONDARY YIELD SPREAD WIDENS FUNDAMENTALS GENERALLY HEALTHY
2017 CRE INVESTMENT: WHAT WAS IT ALL ABOUT?
3
4Investment Review 2017
2017 vs 2016 -Largest Changes by Region
UK Investment Volume (£bn)
£62.1
£49.0
2015 2016 2017
££
££
£67.4££
Coloured arrows and percentages indicate % above/below 2016 volume £0.57bn
North East- 17%
£2.73bnWest Midlands
- 13% £2.68bnEast of England
+49%£0.89bn
Wales+ 72%
£4.03bnNorth West
+ 46%
Investment Volumes Recovered Strongly in 2017
East of England & North West Recorded Big Jumps
Top Foreign Buyers (£bn)
London vs Regions (% Breakdown)
China & Hong Kong
GermanyUSA
£1.1
£4.2
2016 2017
£2.6
£4.0£3.0
£8.2
45% 39%
55% 61%
RegionsLondon
Five-Year Quarterly Avg Q4 2017
Record In�ows from China & Hong Kong
Regions in Demand in Q4 2017
Average Yield by Sector
2017 Investment by Sector (£bn)
O�ce Retail Industrial
RetailO�ce Industrial Alternatives
£26.5
(10%) (41%)
£8.2£10.0
(25%) (67%)
Coloured arrows and percentages indicate % above/below 2016 volume
2015 2016 2017
7.3%
6.9%
6.7%6.7%
6.5%6.5%6.6%
6.4% 6.4%
££
££
££
££
£15.8
££
££
££
££
££
Industrial Yields Continued to Fall
Industrial & Alternatives Stood Out
Key Infographics
5Investment Review 2017
London Office
Retail
Address: Bluewater Shopping Centre, DartfordMonth: OctoberPrice: £152.5m (7.5% stake)Size: 1,868,455 SFPurchaser: Royal LondonVendor: Hermes Real EstateInitial Yield: 4.22%
Build-to-Rent
Address: Springside, EdinburghMonth: MarchPrice: £215mSize: 400 HomesPurchaser: Moda LivingVendor: Grosvenor
South East Office
Address: Milton Park Campus, OxfordMonth: JulyPrice: c. £200m (50% stake)Size: 250 acresPurchaser: CPPIBVendor: Hermes
Industrial
Address: Sainsburys, BirminghamMonth: JunePrice: £102mSize: 803,605 SFPurchaser: Korean ConsortiumVendor: IM PropertiesInitial Yield: 5.10%
Healthcare
Address: Bupa Care Home PortfolioMonth: August Price: £300mSize: 9,000 bedsPurchaser: HC OneVendor: Bupa
Regional Office
Address: No. 1 Spinningfields, ManchesterMonth: OctoberPrice: £200mSize: 308,900 SFPurchaser: SchrodersVendor: Allied LondonInitial Yield: 5%
Hospitality
Student Accommodation
Address: Pure Student Living PortfolioMonth: DecemberPrice: £869mSize: 3,644 RoomsPurchaser: iQ Student AccommodationVendor: Letter One Treasury
Address: 20 Fenchurch St, EC3Month: AugustPrice: £1.28bnSize: 688,000 SFPurchaser: LKK Health ProductsVendor: Canary Wharf Group/LandSecInitial Yield: 3.40%
Key Investment Deals in 2017
Address: Grosvenor House Hotel, London, W1Month: JulyPrice: £575mSize: 494 bedsPurchaser: Ashkenazy Acquisition CorporationVendor: Sahara India Pariwar
6Investment Review 2017
Office volumes rose 25% Y-o-Y to £26.5bn in 2017, fuelled by strong demand for regional offices and helped by two landmark £1bn+ Central London deals (Leadenhall Building and 20 Fenchurch Street). Although foreign appetite for prime, well-let buildings continued, the number of Central London sales actually fell to a 10-year low as investors steered clear of riskier assets. In fact, Central London attracted just 58% of all UK office investment in 2017 (a 10-year low). In contrast, spending on regional offices jumped 17% Y-o-Y, helped by the strongest Q4 in a decade (both in terms of volume and deal frequency). In fact, Q4 was only the second quarter where regional office investment eclipsed £1bn, helped by £100m+ trades in Manchester, Edinburgh and Liverpool.
OFF
ICE
Retail investment fell for a third consecutive year in 2017. It dropped 10% Y-o-Y to just £10bn, the lowest annual total for five years and well below the long-term average. As a share of all investment, retail (16%) hit its lowest point ever and considerably below the average in 2009–11 (36%). With less than £2bn traded, it was one of the weakest years ever recorded for shopping centres. Supermarket investment rose slightly from its 2016 low, but remained fairly subdued. Retail warehouses, however, proved resilient, with some investors viewing the sub-sector as comparatively defensive against a changing consumer landscape.
RETA
IL
Industrial investment jumped to a 10-year high in 2017 as investors—encouraged by strong fundamentals and positive long-term structural trends—poured £8.2bn in to the sector, a rise of 41% Y-o-Y and 41% above the five-year annual average. As a share of all investment, industrial reached its highest ever proportion (13%). Portfolios were especially popular: a record £2.6bn was spent on this type of deal, led by Blackstone and M7’s purchase of a light industrial portfolio from Brockton and Dunedin for £559m in Q3. The number of portfolio trades (49) rose sharply on the previous year (28), with nine selling for a price in excess of £100m, more than in any other year in the last decade. Although excluded from overall volumes due to their corporate nature, the sales of both IDI Gazeley and Logicor in the second half of 2017 further underline investors’ appetite for the sector.
Investment in alternatives soared to £15.8bn in 2017, driven by investor appetite for stable, long-term income. Build-to-rent, hotels, and student accommodation all benefited from strong inflows, with the latter recording the biggest jump. Indeed, student accommodation volumes rose 87% Y-o-Y—boosted by IQ’s purchase of the Regent Portfolio for £869m in Q4— despite some concerns that Brexit could curtail the number of high-spending foreign students opting to study in the UK. The sales of the Jurys Inn portfolio (£800m) and Grosvenor House Hotel (£650m) helped to drive hotel investment volumes up 45% Y-o-Y, partly encouraged by a tourism boom and the view that hotels remain a long-term, defensive asset class.
IND
UST
RIAL
ALTE
RNAT
IVES
Grant Lonsdale Real Estate AnalystIndustrial and Alternatives Stand Out
Investment Review 2017
Office
Retail
Industrial
Mixed
Other
Source: CoStar Group
02468
101214161820
Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17
UK Quarterly Investment by Sector (£bn)
Industrial and Alternatives Stand Out
43%(43%)
16%(23%)
13%(12%)
2%(3%)
26%(19%)
2017 UK Investment by Sector
Coloured arrows and percentages indicate comparison with share of investment in 2016
7
8Investment Review 2017
£0.57mNorth East
- 17%
£4.03bnNorth West
+ 46%£1.24bn
Yorkshire & H.
£0.89bnWales+ 72%
£2.73mWest Midlands
- 13%
£1.23bnEast Midlands
£2.68mEast of England
+ 49%
£24.21bnLondon
+ 19%
£5.56bnSouth East£2.30bn
South West + 43%
+ 5%
£2.80mScotland
+ 39%
+ 27%
- 4%
Source: CoStar Group
0%10%20%30%40%50%60%70%
0
5
10
15
20
25
Q412
Q113
Q213
Q313
Q413
Q114
Q214
Q314
Q414
Q115
Q215
Q315
Q415
Q116
Q216
Q316
Q416
Q117
Q217
Q317
Q417
London Other Regions Multi-Region Portfolio % Other Regions
Quarterly Investment Volume (£bn)
The Rise of the Regions Jamie Campbell Real Estate Analyst
Coloured arrows and percentages indicate % above/below the 2016 volume
Commercial property investment soared across many of the regions in 2017, with the proportion of capital placed outside of London reaching a 10-year high in the fourth quarter.
The North West attracted significant investment in 2017, as volumes jumped to an all-time high of £4bn. The total was boosted by the £200m sale of No.1 Spinningfields to Schroder Real Estate—one of the biggest single-asset trades ever recorded in the region—along with several forward-funding deals for build-to-rent schemes in Manchester, Salford, and Liverpool.
The enduring popularity of the industrial sector helped to boost investment in the East of England and the South West, which recorded Y-o-Y rises of 49% and 43%, respectively. Key industrial sales in these regions included the Debenhams Distribution Centre in Peterborough to Palmer Capital for £86m and the Tesco Distribution Centre in Avonmouth to Roebuck Asset Management for £71m.
Wales recorded the biggest Y-o-Y jump at 72%, as volumes reached £890m. Conversely, investment in the West Midlands fell 13% Y-o-Y, mainly due to relatively weak volumes in the retail sector.
Investment in London climbed to £24.2bn, a rise of 19% Y-o-Y. The total was dominated by several large office trades, most notably 20 Fenchurch Street (£1.3bn) and the Leadenhall Building (£1.1bn). However, deal frequency remained subdued, especially in the City.
9Investment Review 2017
UK
N. America
W. Europe
Middle/Far East
Rest of World Source: CoStar Group
2017 UK Investment by Purchaser Region - Foreign Capital Remains Focused on London
56%
10%
10%
23%
1%UK
29%
8%
15%
46%
2%LONDON
82%
5%
5%7% 1%
UK EXCL. LONDON Note: Figures in regional charts exclude multi-region portfolios
Foreign Expenditure Just Shy of 2015 High
Foreign spending on UK commercial property rose 26% Y-o-Y to £24.2bn in 2017, and prime Central London assets continued to be the main targets. Despite the increase from 2016, total foreign spending in 2017 fell 14% short of the 2015 record and the share of UK investment that came from foreign buyers stayed static at 44%.
North American buyers bought less, but Asian buyers picked up the slack, increasing from 18% to 23% of total investment. North Americans were net sellers in 2017 for the first time in at least a decade, divesting of £1.8bn after averaging net inward capital flows of £6.6bn per year from 2014-15. China/Hong Kong investors spent £8.2bn in 2017, accounting for more than 13% of the total, and nearly triple the amount spent in 2016. Their focus on trophy buildings such as the
Leadenhall Building and 20 Fenchurch St, has supported pricing at the top end. Motivated in part by a favourable exchange rate, German investment more than doubled from 2016 to 2017, reaching £2.6bn. Nearly half of this volume was invested in Q2 2017, fuelled by deals such as Deka’s £485m purchase of Cannon Place. Investment from China/Hong Kong, USA, and Germany combined accounted for 24% of the commercial real estate traded in the UK in 2017, a figure that does not include deals in which some business value was included, like China Investment Corporation’s £2.4bn acquisition of Logicor.
Despite remaining net sellers, UK investors increased their spending in 2017, largely in the regions. Overall domestic spending was up by 25% over 2016 with spending on Big Six offices up 59%. Just a fifth of domestic investment was in London in Q4 2017, down
from a third in Q3 2017. UK capital accounted for 16% of the total spend on Central London offices in Q4 2017, well below the five-year quarterly average of 29%. Local authorities continued to play a big part, spending a record £1.9bn in 2017. Local authorities have helped to fill the void left by the REITS, which have largely focused on share buybacks in 2017.
While 81% of foreign investment was in London in 2017, there are signs that global buyers are venturing out of the capital as well. Foreign buyers were responsible for 21% of spending outside of London in Q4 2017, up from 13% in Q3. China/Hong Kong investors have traditionally focused very much on London and in 2016, 95% of Asian spending was in London and the South East. In 2017, that proportion fell 89% as spending in the Big Six cities jumped from less than 1% to 7%.
Erin Amon Real Estate Analyst
Singapore
£1,825mVS 2016
£2,604mVS 2016
Germany
Canada
£1,128mVS 2016
-48%
USA
£4,193mVS 2016
China & Hong Kong
£8,246mVS 2016
UAE
£652mVS 2016
+5%
+115%
+130%
+174%
-19%
Top Foreign Investors by Country in 2017
Investment Review 2017 10
11Investment Review 2017
Average All-Property Yield (Unweighted) Average Yield by Sector Average Yield in London vs. Rest of UK
5.5
6.06.57.07.58.08.59.0
Q408
Q209
Q409
Q210
Q410
Q211
Q411
Q212
Q412
Q213
Q413
Q214
Q414
Q215
Q415
Q216
Q416
Q217
Q417
All-Property
Initial Yield (%)
6.06.57.07.58.08.59.09.5
10.0
Q408
Q209
Q409
Q210
Q410
Q211
Q411
Q212
Q412
Q213
Q413
Q214
Q414
Q215
Q415
Q216
Q416
Q217
Q417
O�ce Retail Industrial
Initial Yield (%)
0
50
100
150
200
250
300
350
4
5
6
7
8
9
10
Q408
Q209
Q409
Q210
Q410
Q211
Q411
Q212
Q412
Q213
Q413
Q214
Q414
Q215
Q415
Q216
Q416
Q217
Q417
Di�erence (basis points) London UK ex. London
Initial Yield (%) Basis Point Spread
• The average all-property yield rose during the first half of 2017 but compressed again in the second half, returning to its mid-2016 level by the end of the year.
• Recent yield compression was driven by the regions. Average yields in the regions fell by 40 bps in the second half of 2017 to 6.67%, their lowest point since Q2 2008.
• And with London all-property yields stable in the final quarter, the yield gap between London and the regions continued to narrow, reflecting recent investor demand
• Industrial yields recorded the greatest compression, in both Q4 2017 and across the year as a whole. Retail yields rose in Q4 and are now on a par with industrial yields.
• Industrial is the only sector where average yields are below their pre-crisis level (-76 bps), reflecting positive sentiment. Retail yields are markedly higher (+71 bps), with average shopping centre yields particularly elevated at more than 8%.
• Average Central London office yields rose sharply in Q4 2017, to a three-year high. By contrast, office yields outside of London fell to a 10-year low.
• The yield gap between prime and secondary property widened during 2017, reflecting an aversion to risk and a preference for stable income over yield. Prime pricing has moved upwards accordingly. In this context, and given healthy occupier market fundamentals in much of the country, investors may look increasingly at secondary property during 2018.
Mark Stansfield Managing AnalystYields Falling in the Regions
Source: CoStar Group
Note: Yield analysis is based on all transactions above £1m
Basis point spreadInitial Yield (%)Initial Yield (%)Initial Yield (%)
Investment Review 2017
CoStar Repeat-Sale Indices: Prime Pricing Proving Resilient
Source: CoStar Group
• London prime office pricing reached new highs in 2017, despite a dip in the final quarter. Regional prime offices hardened too in 2017, reflecting increased investor appetite and falling yields, but remain below 2007 peaks.
• The price of industrials – both prime and secondary – are above 2007 levels, reflecting the strength of investor demand. Investment volumes are at 10 year highs.
• Retail pricing remains below 2007 peaks. Overall, prime retail has held its value better than secondary retail.
Methodology
The CoStar Repeat-Sale Indices (RSI) measures the movement in the prices of commercial properties by collecting data on actual transaction prices. When a property is sold more than once, a sales pair is created. The prices from the previous and most recent sales are then used to calculate price movement for the property. The aggregated price changes from all of the sales pairs are used to create a price index, which is measured quarterly.
CoStar uses two types of repeat-sales regression methodolo-gies. The equal-weighted index* treats every transaction equally, regardless of the value of the transaction, resulting in a bias towards low-value deals. The value-weighted index** weighs the price change by value of each transaction. The equal-weighted index is more relevant for measuring the performance of individual properties, while the value-weighted index is useful for gauging overall market performance.
*Based on the geometric mean**Based on the arithmetic mean
Chris Johns Real Estate Analyst
12
0
50
100
150
200
250
Q1 0
5
Q4
05
Q3
06
Q2
07
Q1 0
8
Q4
08
Q3
09
Q2
10
Q1 1
1
Q4
11
Q3
12
Q2
13
Q1 1
4
Q4
14
Q3
15
Q2
16
Q1 1
7
Q4
17
Inde
x Va
lue
(200
5Q1
= 10
0)
Retail VW Industrial VW London O�ce VW Regional O�ce VW
UK Value-Weighted Indices by Sector
13Investment Review 2017
3 Hardman Square, Manchester
Q1 2015—Credit Suisse sold to M&G Real Estate for £91.7m
Q1 2018—M&G Real Estate sold to Royal London Asset Management for £107.3m
CoStar Repeat-Sale Examples
5 St Philips Place, Birmingham
Q2 2014—Climate Change Capital sold to Savills Investment Management for £38m
Q4 2017—Savills Investment Management sold to Royal London Asset Management
for £45m
70 Gracechurch Street, London, EC3
Q3 2013—Moritz Holdings sold to Legal & General for £202m
Q4 2017—Legal & General sold to Tenacity Group for £271.4m
Source: CoStar Group
14Investment Review 2017
Best Performing Office Markets: Introducing CoStar’s New Analytics Tool
Mark Stansfield Managing Analyst
Office rents in Hertfordshire are rising at a faster rate than any other UK Market, according to CoStar’s new analytics and market comparison tool. Indeed, average asking rents in the county have risen by 16.6% over the last 12 months, to stand just below £22/SF. Low vacancies and positive net absorption helped drive the increase. The second-best performer over the past year was Suffolk, where average rents climbed 13.6% to £11/SF. Other strong performer in the top 10 include York, Cambridge, Birmingham and Bristol, all of which have recorded
growth rates above 7% amid strong years for net absorption.But office rental growth has not been uniformly positive across all UK markets. CoStar breaks the UK up into 64 office markets (and 486 submarkets, all of which are reported on), with rents actually falling in one out of three markets.The Tees Valley & Durham market has recorded the greatest fall over the past year (-7.1% at the time of writing), with the Highlands & Islands, Northampton, London City and London Midtown each recording rental declines of 5% or more.
• Instantly compare and rank the performance of more than 700 office and industrial markets and submarkets, across 12 key variables, to identify opportunities and risks. This analysis can also be segmented by building quality.
• Ability to peer markets and submarkets by region and against a national benchmark.
• Reports for every office and industrial market and submarket across the UK, which are now updated daily to reflect the latest market developments.
• Reports have been enhanced with new functionality, including five-year forecasts for every market and submarket, and links to building reports in the live product.
• More than 150 reports contain written analysis, including areas seldom reported on. This will rise to more than 200 by end of Q1 2018.
As of 5th of February 2018
What’s in the new CoStar analytics tool?
15Investment Review 2017
Best Performing Industrial Markets: Introducing CoStar’s New Analytics Tool
Grant Lonsdale Real Estate Analyst
Strong demand, particularly from online and discount retailers, has fuelled strong net absorption in the industrial sector over the last year. Indeed, Amazon’s rapid expansion helped Essex—the location of its 2.2 million SF fulfilment centre and one of 12 industrial markets where net absorption exceeded 1 million SF—to record stronger demand than any other UK market over the last 12 months. The e-commerce giant also moved into large warehouses in the Manchester, Shropshire & Staffordshire, and Sheffield markets, which were the second, third and fourth-best performers, respectively. Meanwhile, the Birmingham market got a boost after German discount retailer Lidl opened a 450,000 SF distribution centre in Wednesbury.
In contrast to the best performing markets—which have benefited from the continuing growth of online and discount retail—some of the worst performers have been impacted by consolidation among traditional retailers. Indeed, Hertfordshire, Derby, and Lincoln—where Tesco and Co-op recently closed large distribution centres—were just three of the 11 UK industrial markets that posted negative net absorption over the last 12 months. Hull and Surrey were also among the worst performers following several large move-outs but very few move-ins.
Click here to find out moreDo you want to learn more about CoStar’s new Market Analytics tool?
Investment Review 2017
Net Absorption, Net Deliveries & Vacancy
Occupier Market Conditions: National Offices
• Net office absorption totalled 8.2m SF in 2017, well ahead of the 3.3m SF in 2016 but more than 30% behind 2014’s nearly 12m SF.
• Manchester, Birmingham, and Bristol have all benefited from relocations out of London, most notably by public sector organisations such as HMRC and back office finance and legal operators.
• Absorption has also been boosted by the proliferationof serviced and flexible office provides. This was especially apparent in London with the expansion of WeWork, which is now one of the largest occupiers in the capital.
• Even at a six year high above 5m SF, deliveries were outpaced by demand which resulted in a sub-7% vacancy rate by year end. This is the lowest the national office vacancy rate in over a decade.
• As of the end of January 2018, there is more than 21m SF under construction across the nation. Most of it is concentrated in London, with a clutch of 500,000 SF-plus buildings being erected, mostly in the City.
• Regional cities are also experiencing significant levels of construction, thanks in part to regeneration and infrastructure projects such as HS2. Ongoing office construction totals more than 3m SF in Manchester, Birmingham, and Leeds as of late January. Many under construction buildings are pre-let, but increased new stock and refurbishments could help ease tight regional occupier markets where vacancy rates are near record lows.
• Robust demand underpinned strong rental growth through 2015 and 2016 but growth slowed through 2017, and has turned negative as of early 2018. Growth has been pulled down by London (due to its size on a NIA basis), where average rents have been falling for multiple quarters in many submarkets. The deepest cuts have been in the City.
• The rental story is more positive outside of London, where the average rent has grown in most markets. Birmingham, Bristol and Cambridge all registered strong in 2017, and further gains are likely.
Source: CoStar Group
Asking Rent Growth (YOY)
Richard Yorke Director of Analytics
16
Investment Review 2017
Net Absorption, Net Deliveries & Vacancy
Occupier Market Conditions: National Industrial
• Industrial fundamentals are the strongest they have been in more than 10 years, with vacancies below 3.5% as of late January 2018.
• Net absorption over the last year was 30% ahead of the deliveries over that period. Annual net absorption has outpaced supply additions each quarter since the beginning of 2013, by almost six times on average.
• This year is poised to be a peak year for industrial development with more than 32m SF expected to deliver. Logistics properties account for more than 90% of the new construction, compared to the 65% share of existing inventory.
• The largest under construction scheme is the 2.2m SF Amazon warehouse in Bristol which has helped make the market the top for industrial development. The 3.7m SF under construction there as of January accounts for nearly a fifth of ongoing national development.
• Lidl distribution centres are responsible for three of the eight largest current projects in the nation, a total of about 1.8m SF across centres in Sheffield, Glasgow, and Manchester.
• High demand has allowed for substantial rent increases and annual rent growth has averaged nearly 7% since the beginning of 2016.
• Average rents grew by more than 7.5% in the past 12 months, compared to slight losses in the office sector. Growth has been particularly strong early into 2018, growing by more than 2% in just the first month of the year.
• At about £6.50/SF, the average industrial rent in January 2018 is more than 30% above the 2011 low.
Source: CoStar Group
Asking Rent Per Square Foot
Erin Amon Real Estate Analyst
17
Paul Norman Managing News Editor
CoStar NewsOutlook for 2018
At the beginning of 2017 there was general consensus that commercial real estate was facing a challenging year, with values, yields and take-up – apart from in industrial – all expected to come under pressure. 2018 gets underway with most relieved by the robust performance recorded in this report over the past 12 months, and expecting much the same again.
The standout performers of 2017 – industrial, regional offices and alternatives such as student housing – remain in favour, and while a handful of stalled IPOs and fund launches targeting these areas recently may suggest the boat has been missed for those looking to get in on the action, it is safe to assume that prices will continue to be under pressure here in the coming months.
A slew of major regional deals at the end of 2017 suggest that prime pricing is indeed holding firm in all areas (apart from the shopping centre arena), with little evidence of market yields shifting outwards.
The elephant in the room has been concerns over occupier appetite for real estate – apart from industrial again. But the yearly office take-up figures recently published show records being hit not just in the big regional cities, where the Government Property Unit has of course played a big part, but in Central London too.
All of which is a welcome if surprising outcome, driven no doubt by some expected (and some unexpected)
white knights riding in to save the day, including overseas buyers, local authority investors, flexible office space operators and online retailers – plus a continued low interest rate environment and low cost of debt – obvious examples.
Looking to 2018, if the market’s performance is in some ways being propped up by non-traditional protagonists, should there be fears of a bubble about to burst?
Well, most expect demand from foreign capital to stay strong, but it is likely to remain heavily tilted towards core, income-producing assets, particularly given the budget announcement to extend capital gains tax to foreign buyers. And that continued
focus on core and income – and the knock-on turn away from secondary assets in weaker locations – will surely start to impact prices more significantly in this area this year too. In this environment, Savills predicts “secure long-life income streams are going to be ever more highly prized by real estate investors over the next five years”.
There is undoubtedly a sense that we are in a late-cycle market waiting for the correction to come. But there will be many who see plenty of opportunity in that middle ground, away from the super-prime areas or the tertiary, to put their skillsets to the test and secure significant reward.
18Investment Review 2017 18
“We suspect 2018 will see investors and occupiers holding back from decision making where possible, further regulatory scrutiny, more tax for investors and greater risk aversion. The positive from this inertia will be sustained low nominal interest rates and a continued focus on prime assets, as evidenced already by some very large transactions in 2017. There is also a positive for investors who can look at asset not on a pure rent and yield perspective but in terms of the alternative uses the asset provides in a changing world.”
- Alex Price, CEO, Palmer Capital
“2018 could take a number of paths and inevitably there are many unknowns. Winners will be those investors who not only have resilient assets to protect them against downside risk, but can also adapt to capture growth potential if occupier demand surprises to the upside. The thread running through all of this is the need to understand and respond to occupiers, and meet their evolving requirements.”
-Robin Martin, Research Director, Legal & General Property
“Significant investor interest in the UK market is likely to continue given its status as a liquid and highly transparent market supported by a well-established and respected legal system.”
-Richard Gwilliam, Head of Property Re search, M&G Real Estate
“With sterling likely to remain competitive against the US dollar, further new entrants, particularly from Asia, are expected to enter UK market, attracted by buy-side currency plays. The UK will also continue to benefit from ongoing questions surrounding US and Chinese foreign and economic policies, as its reputation as a safe, liquid and transparent haven for investment and will continue to attract global institutional money.”
-Tony Horrell, CEO UK & Ireland, Colliers In ternational
“Rebounding strongly from the uncertainty in the immediate aftermath of the Brexit referendum, the UK investment market has seen a surge in transaction volumes. Total returns have been similarly buoyant, powered by a thriving industrial sector. Although we forecast a weaker economic outlook, we expect that solid income-driven performance over the medium term, combined with strong demand for property exposure on both the debt and equity side, will ensure investment volumes remain robust.”
- Miles Gibson, Head of UK Research, CBRE
“Broadly flat capital values mean that income will be the major driver of returns in 2018. However, we expect the market to polarise further, with quality assets well aligned to structural change attracting the most occupier interest and the strongest income performance.”
- Tom Duncan, Senior Analyst, Mayfair Capital
“My view is that the outlook from here is a mixed picture, with some parts of the UK commercial property market positively underpinned by structural trends and others more vulnerable to ongoing Brexit related uncertainty and medium-term economic headwinds. Industrial is a particularly attractive segment, especially warehouses, with the move to online shopping.”
- Jason Hollands, Managing Director, Tilney Group
“Following a number of recent landmark deals, 2018 will see wider participation by institutions and pension funds in the alternative sectors, especially for direct let and operational platforms. This demonstrates that these sectors are now a key component of the property market. Concerns over exposure to increased risk outside of traditional markets will be offset by sound underlying market drivers.”
- Ollie Saunders, Head of Alternatives, JLL
“Our base case is that pricing will weaken gradually as rental growth slows and bond yields slowly edge out, favouring long-income strategies. However, there is a risk a sharper rise in bond yields might be ‘imported’ from the US should the Federal Reserve’s ongoing rate hikes lead to higher yields across global bond markets. In that event, low-yielding property sectors would be hit particularly badly.”
- Tom Goodwin, UK Strategy & Research Analyst, Aviva Investors
Outlook for 2018: Views from the Industry
Investment Review 2017 19
20Investment Review 2017
JLL topped the Q4 2017 sales table with a total of £3.3bn. Standout deals included the sale of a 311-store retail portfolio for £260m and the £136m disposal of 99 Gresham Street on behalf of Legal & General. Knight Frank’s representation of iQ Student Accommodation in the biggest deal of the quarter placed them comfortably at the top of the acquisitions table. CBRE finished second and third
respectively, on the sales and acquisitions tables. Savills completed the top three on the sellers’ side, helped by their disposal of the Study Inn student accommodation portfolio to Arlington Investors. JLL were second on the buyers’ side, helped by the acquisition of Five Churchill Place, E14, on behalf of Cheung Kei Group.
Q4 2017 League Tables: Investment Agents
Rank Q4 2017
(Q3 2017)Vendor Agent Value £m
1 (1) JLL 3,253 2 (2) CBRE 1,515 3 (6) Savills 998 4 (7) Knight Frank 989 5 (4) Cushman & Wakefield 889 6 (3) Eastdil Secured 800 7 (5) Colliers International 564 8 (-) BNP Paribas Real Estate UK 438 9 (12) DTRE 344 10 (-) Capital Real Estate Partners 339 11 (-) Wilkinson Williams 289 12 (-) Farmer Capital 200 13 (-) Montagu Evans 197 14 (-) HP Four 159 15 (-) Gerald Eve 154
Rank Q4 2017
(Q3 2017)Purchaser Agent Value £m
1 (6) Knight Frank 1,5972 (1) JLL 1,0733 (5) CBRE 1,0084 (4) Savills 9665 (-) BNP Paribas Real Estate UK 9446 (2) Cushman & Wakefield 5367 (3) Colliers International 4758 (8) DTRE 4039 (13) Tudor Toone 24110 (15) GVA 19711 (-) Jackson Criss 16712 (12) Gerald Eve 15813 (-) Coady Supple 15514 (-) Harvey Spack Field 15215 (-) Hanover Green 148
Investment Agents - Sales Investment Agents - Acquisitions
Source: CoStar Group
Q-on-Q changeQ-on-Q change
Q-on-Q change
21Investment Review 2017
Eastdil Secured’s sale of a Jury’s Inn hotel portfolio helped see them to the top of the single branch sales table once again, with a final figure of £800m. DTRE were second on the sales table, while going one better on the buyers’ side. Notable deals include the £78.5m disposal of two units at Prologis Park, Stoke, to Tritax
Big Box REIT. Capital Real Estate’s disposal of Five Churchill Place, E14, on behalf of Saïd Holdings meant they completed the top three on the sales table. Strong quarters by Tudor Toone and Coady Supple, saw them finish second and third, respectively, on the acquisition table.
Q4 2017 League Tables: Single Branch Agents
Rank Q4 2017
(Q3 2017)Vendor Agent Value £m
1 (1) Eastdil Secured 8002 (4) DTRE 3443 (-) Capital Real Estate Partners 3394 (8) Wilkinson Williams 2895 (-) Farmer Capital 2006 (9) HP Four 1597 (12) Michael Elliott 1518 (-) Staunton Whiteman 1299 (-) Gryphon Property Partners 10710 (3) Fineman Ross 9311 (11) ACRE Capital Real Estate 8812 (-) M1 Agency LLP 8513 (10) Cortex Partners 7314 (2) Tudor Toone 7215 (-) Harvey Spack Field 53
Rank Q4 2017
(Q3 2017)Purchaser Agent Value £m
1 (2) DTRE 4032 (5) Tudor Toone 2413 (-) Coady Supple 1554 (6) Harvey Spack Field 1525 (-) Hanover Green 1486 (15) Cyril Leonard 1287 (-) CWM 1258 (11) Franck-Steier Price 1219 (-) Chapman Petrie 9510 (-) Monarch Commercial 9311 (-) Hampson Wall 9112 (-) M1 Agency LLP 8813 (-) Finn & Co 7314 (-) ACRE Capital Real Estate 6615 (-) Staunton Whiteman 57
Single Branch Agents - Sales Single Branch Agents - Acquisitions
Source: CoStar Group
Q-on-Q changeQ-on-Q change
Q-on-Q change
22Investment Review 2017
JLL and Savills claimed the number one annual spots for a second year in a row. After topping the quarterly tables three out of four quarters, JLL finished 2017 as the top sales agent after brokering almost £10bn worth of deals. Savills representation of the purchasers in some of the years biggest deals—the Leadenhall Building,
Cannon Place, and Rathbone Square—helped them repeat their 2016 success. CBRE also matched their 2016 placings by finishing second for sales and third for acquisitions. Meanwhile, JLL were second on the acquisition side and Eastdil completed the top three on the sales table.
2017 Annual League Tables: Investment Agents
Rank 2017(2016) Vendor Agent Value £m
1 (3) JLL 9,787 2 (2) CBRE 7,574 3 (4) Eastdil Secured 4,881 4 (1) Cushman & Wakefield 4,861 5 (6) Savills 3,292 6 (5) Knight Frank 2,227 7 (9) Colliers International 2,064 8 (10) Strutt & Parker 1,097 9 (-) DTRE 1,021 10 (-) Michael Elliott 934 11 (15) Gerald Eve 734 12 (7) BNP Paribas Real Estate UK 714 13 (-) Allsop 498 14 (13) GVA 491 15 (-) Montagu Evans 458
Rank 2017(2016) Purchaser Agent Value £m
1 (2) Savills 5,5332 (10) JLL 4,3993 (5) CBRE 3,5684 (1) Knight Frank 3,0535 (3) Colliers International 2,6816 (4) Cushman & Wakefield 2,6207 (-) BNP Paribas Real Estate UK 1,9138 (13) GVA 8599 (-) DTRE 81210 (-) Gerald Eve 68711 (-) Tudor Toone 59412 (-) Montagu Evans 55413 (15) Allsop 51614 (-) Strutt & Parker 48715 (9) M1 Agency LLP 452
Investment Agents - Sales Investment Agents - Acquisitions
Source: CoStar Group
Y-on-Y change
Y-on-Y change
23Investment Review 2017
Eastdil topped the annual table again in 2017 after being involved in almost £5bn worth of disposals. Their biggest deal of the year was the £1.28bn sale of 20 Fenchurch Street, EC3, in Q3. DTRE topped the acquisitions table this year, after narrowly missing out last year, with a final figure of £812m. They also claimed
second place on the sales table, with Michael Elliott retaining their place in the top three. Tudor Toone and M1 Agency finished second and third, respectively, on the acquisition table.
2017 Annual League Tables: Single Branch Agents
Rank 2017 (2016) Vendor Agent Value £m
1 (1) Eastdil Secured 4,8812 (4) DTRE 1,0213 (2) Michael Elliott 9344 (6) Wilkinson Williams 4265 (-) Capital Real Estate Partners 4056 (3) Tudor Toone 3897 (-) Fineman Ross 3338 (14) HP Four 3119 (-) Coffer Corporate Leisure 25310 (15) Cortex Partners 21011 (-) Hoddell Stotesbury Morgan 20512 (-) Lunson Mitchenall 20513 (5) Farmer Capital 20014 (-) ACRE Capital Real Estate 17015 (-) Hanover Green 150
Rank 2017 (2016) Purchaser Agent Value £m
1 (3) DTRE 8122 (7) Tudor Toone 5943 (-) M1 Agency LLP 4524 (4) Capital Real Estate Partners 3455 (15) Kieran D. Cotter & Co 3396 (-) Harvey Spack Field 3207 (2) Michael Elliott 3188 (11) Cortex Partners 2919 (-) Tydus Real Estate 26910 (5) CWM 24011 (-) Cyril Leonard 21912 (-) Franck-Steier Price 20513 (-) Hanover Green 17214 (-) Prime Retail 17015 (-) Ereira Mendoza 166
Single Branch Agents - Sales Single Branch Agents - Acquisitions
Source: CoStar Group
Y-on-Ychange
Y-on-Ychange
24Investment Review 2017
Mark Stansfield Managing Analyst T: 020 3205 4589 E: [email protected]
Erin AmonReal Estate AnalystT: 020 3205 4578E: [email protected]
Grant LonsdaleReal Estate AnalystT: 0141 354 0646E: [email protected]
Chris JohnsReal Estate AnalystT: 0141 354 0641E: [email protected]
Jamie CampbellReal Estate AnalystT: 0141 354 0610E: [email protected]
Richard Yorke Director of Analytics T: 020 3205 4670 E: [email protected]
Paul Norman Managing News Editor T: 020 3205 4510E: [email protected]
Jonathan Dox Research Manager T: 020 3205 4624 E: [email protected]
Iain Smyth Investment Research AssociateT: 0141 354 0629 E: [email protected]
David FauldsInvestment Research AssociateT: 0141 354 0853E: [email protected]
For more information on our methodology or the data in this report please contact one of the authors
Data, Analytics and News Have Come Together
Access a unique combination of Data, Analytics and News, offering the most comprehensive macro-to-micro explanation of the latest trends in the UK property market.
CoStar’s proprietary data, which underpins this report, is sourced directly from UK property agents, investors and other involved parties to accurately reflect the transactional market in real time.
Typically 1000+ investment deals are recorded each quarter, more than any other data source. The Analytics team then overlays top-down analysis of the UK market on this unique dataset, breaking down investment trends by sector, sub-sector, geography, lot size, investor type, and yield.
Finally the News team adds perspective to the analysis by providing timely industry and market updates.
24
25Investment Review 2017
Get in Touch with CoStar CoStar Group (Nasdaq: CSGP) is the leading provider of commercial real estate information, analytic and marketing services. Founded in 1987, CoStar conducts expansive on-going research to produce and maintain the largest and most comprehensive database of commercial real estate information.
Our suite of online services enables clients to analyse, interpret and gain unmatched insight on commercial property values, market conditions and current availabilities.
CoStar maintains offices throughout the U.S. and in Europe with a staff of approximately 3,500 worldwide, including the industry’s largest professional research organisation.
London020 3205 4500
[email protected] www.costar.co.uk
Glasgow0141 354 0600
Manchester0161 971 2120
Birmingham0121 293 0905
Interested in sponsoring future publications?Contact Richard Goff on 020 3205 4675
CoStar Suite
