The main sources of foreign capital are changing, according to Cushman & Wakefield. Top investors from the United States, China and Hong Kong have either been net sellers or absent from the market in 2019.
In their absence, other investors have stepped up. Persistent buying by French investors (£4 billion) over the last 12 months has launched the country back into the top 10 rankings for net investment into the UK since 2006. Investors from South Korea (£0.9 billion) and Israel (£1 billion) have also been buying in large volumes, Cushman says.
Both countries are now top 20 net investors into the UK, displacing traditional European sources like the Netherlands.
Greg Mansell, Head of UK Research & Insight at Cushman & Wakefield, explains:
“Average net initial yields were 5.6% for transactions this quarter, up 15bps on Q2 2018. Most deals had yields between 4.5% and 7.5%. But more deals completed below this range compared to earlier quarters, as appetite for long-income assets continued to drive their yields down. With further declines in government and corporate bond yields expected this quarter, Cushman & Wakefield anticipates the demand for long-income portfolios to continue. Furthermore, the growth in ground rents and income strip deals is also set to persist.
“In contrast, there were fewer high yielding deals. Opportunistic investors are keen to buy higher-yielding assets, but these deals need extra work to assess the risks and financing them is increasingly difficult.
“Lower economic growth and higher credit risk are applying upward pressure to real estate yields. However, government and corporate bonds fell this quarter, allowing spreads to increase without making a material impact to real estate yield levels. Overall, real estate pricing is proving steady with lower prices becoming common in the challenged parts of the retail sector.”
According to Cushman, the top three UK deals in Q2 2018 include:
- Vinci acquiring a major stake in Gatwick Airport in May 2019 for £2.9 billion;
- A £1 billion+ acquisition of a London office building by an owner-occupier; and
- The sale of 12 supermarkets to Realty Income Corporation at 5% initial yield.