The Real Estate Investment Forecast for 2012 Q2 from Colliers International shows that the outlook for the UK economy for the remainder of 2012 is mixed due to external pressures from foreign shores. The Olympics though, have the potential to provide a short-term uplift in sentiment for Q3.
With bond yields exceptionally low, secure income streams from property continues to look attractive with IPD’s All Property initial yields at 6.3%. Rental growth across All Property has essentially been stagnant since July 2010, as any growth in H2 11 was reversed in H1 12.
With European banks deleveraging and exceptionally low yielding gilts, non-bank lenders are entering the market or expanding their loan books, providing alternative financing to investors.
There was GBP7.1bn in commercial property transactions completed in Q2, slightly below the four quarters moving average of GBP7.3bn. For the fifth consecutive quarter overseas investors were the largest investors in the UK, taking about 66% of the market share.
n Q2 12, office investment transactions reached nearly GBP4.6bn, up 16% over Q2 11, of which GBP2.4bn was in the City. West End office investments are down from Q1, dropping GBP1.1bn to GBP736m. The shortage of quality West End space is seeing yields being minimised as investors are competing for stock.
Offices total return has been lowered to 4.2% from 6% due to our expectation that regional yields will continue to move out, outweighing the strength of the Central London market.
The list of multi-store retailers falling into administration grew in Q2. About 37% of the total shops of failing companies have closed in Q2, marginally better than the 41% recorded in Q1 12.
Investment in the retail sector has slowed significantly with only GBP1.4bn transacted in Q2, down 48% from Q2 11.
Vacancy rates for big sheds continue to fall as new supply is slow to come to market while demand is modest. Big sheds availability has fallen by 28m sq ft in the past two years across the UK, highlighted by a 60% drop in availability in London.
Rahim Jiwani, Property Economist at Colliers International, said:
“For a significant amount of domestic investors, investing in UK commercial property remains reliant on availability of debt financing, which has been contracting since 2009. As a result, the downward trend of debt could be coming to a trough as healthy lending margins are attracting new entrants to the market. Across Europe, the long term refinancing operations conducted by the ECB in December and February have been instrumental in lowering Libor and keeping liquidity available for banks. But as the Eurozone crisis continues to evolve, it appears as though more ECB intervention is likely needed to keep the cost of capital down.
“In H1 2012, Americans have been the largest foreign investors in UK property, spending GBP2.3bn at an average yield of 6.6%, while Europeans have taken GBP1.7bn at an average yield of 5.3%. Americans have been seeking opportunities in regional offices, industrial portfolios and a few retail units, while Europeans are investing in Central London offices. By value, in H1 12, about 45% of American investment has been outside of London, while Europeans have put 9% of their investments outside of the capital.
“According to Property Data, there was GBP7.1bn in transactions completed in Q2, slightly below the four quarters moving average of GBP7.3bn. For the fifth consecutive quarter overseas investors were the largest investors in the UK, taking about 66% of the market share. Overseas investors purchased GBP4.6bn and disposed of GBP2bn this quarter; UK institutions and private propcos were net sellers GBP670m and GBP1.1bn respectively.”