Daily News
Investment Market Gains Momentum
Encouraging Signs For The North’s Commercial Property Investment Market
The UK commercial property investment market gave further evidence of its recovery with the highest level of activity recorded in the last two years. National commercial property consultancy, Lambert Smith Hampton’s (LSH) quarterly research into the UK investment market (UKIT) reveals turnover of £8.3bn in Q2 2010. A total of 15 deals in excess of £100m completed, accounting for £3bn of the total.
Overseas investors have replaced UK institutions as the most active investors in UK commercial property, accounting for nine of the top 20 positions in LSH’s most active buyers index. The largest transaction in Q2 was the £580m purchase of the Knightsbridge Estate by the Saudi Arabian investor Olayan Group from Avestus Capital Partners (formerly Quinlan Private), representing a 4% net initial yield.
Ezra Nahome, CEO of LSH said: “The market has become more broadly based in recent months with renewed buying activity from several sources that have been out of the market for some time. The greater variation of buyers must bode well for the coming months, in what we believe will be a more challenging market.”
After a period of increased activity at the start of 2010, which has resulted in a swift adjustment in values, the market is expected to go through a period of consolidation as it finds its new level. There have been significant changes over the past 12 months. Transaction yields have fallen by almost 150 basis points on average, with the retail warehouse and distribution sectors seeing adjustments of up to 250 basis points.
Ezra commented: “The market needs to pause for breath, to allow investors to become comfortable with the new yield regime.”
To date, yield improvement has been focused on prime assets, with secondary property values in some cases still languishing at levels set near the bottom of the market. This is likely to remain the case until investors become more confident about the underlying strength of the economy. This may take some time to be established and fears of dipping back into recession does nothing to help investor sentiment.
Ezra added: “The austerity package instigated by the new government has made investors unsure about the prospects for the recovery in the economy. The early signs from the equity market showed nervousness but property remains an attractive asset class and, with running yields of almost 6.5%, compares favourably with the return investors can achieve by investing their cash in the equity or bond markets.
“The market may have come a long way in a short period of time but this has arguably been too much too soon and further improvement will be harder to achieve for the remainder of the year.”
Regional overview:
Investment activity across the North East rose by 20% during the second quarter of 2010 to £96.5m.
While the region witnessed a similar number of transactions as the previous quarter, the average deal price increased to more than £9.65m – a rise of more than 44%.
Darron Barker, Head of LSH Newcastle, said: "The North East’s commercial property investment market continues to see encouraging levels of demand, from a broad range of sectors.”
Key transactions so far this year have included Aviva Investors’ purchase of the House of Fraser building in Carlisle for £14.65m, and Warburg-Henderson’s acquisition of a logistics building in Chester-le-Street for £16.25m.
The largest transaction in the region was Highbridge’s sale of the BAE Systems facility at Radial 64 in Washington for £38.8m.
Barker added: “Against a backdrop of increased activity and prices for prime stock, property investors remain strongly focused on the quality and security of the income attached to any potential investment.
“Locally, we do not anticipate any significant yield movement until it is clear that rents have stabilised to underpin a sustained improvement in market values, particularly in the case of secondary stock.”