UBS: Investment activity slumped by one-third in H1

Investment activity in the UK slumped by almost one-third (32%) to £19.8 billion in H1, according PropertyData, in the lowest volume for the first half of the year since 2012, driven by the twin drags of Brexit uncertainty and retail’s deepening malaise.

In H1, just £2.5 billion worth of retail property was transacted, according to PropertyData cited by UBS in its Real Estate Outlook report, as liquidity in the sector continues to weaken.

Zachary Gauge, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:

“Anecdotally we are hearing that there are opportunistic buyers considering investing in the sector, but the gap between valuations and realistic market pricing is so wide on both the underlying rental levels and yields that it is very challenging to ascertain a fair value price for assets or to call the bottom of the market.

“Generally, it is only the better quality assets which are transacting, particularly where there remains a reasonable amount of interest at a moderate discount to NAV and / or with some specific favorable terms applied for the buyer. But outside this segment it is likely to be some time before we see any more mainstream buyers start to consider the sector again, and it is likely we will see an increasing number of deals on a redevelopment or land value basis as values fall further.”

Central London office transaction volumes also fell 40%, compared to H1, which included the “rather questionable deal to the Citi Group in Canary Wharf where they purchased the building they lease (and so not indicative of traditional investment demand) for £1.1 billion”, said UBS.

UBS’ Zachary Gauge continued:

“Generally speaking, foreign buyers, in particular Asian buyers, have taken a step back from the market as the political uncertainty and the downside risks to a no-deal Brexit would have a significant impact on both currency and potential short-term valuations. However, we do expect that with pricing in Central London favorable compared to other global property markets, should a deal be reached we could see capital quickly flow back into the market in 2020.

“We also saw a significant decline in industrial transactions, which correlates with the sector slipping down the preference rankings in various investor intentions survey. Although most commentators still forecast rental growth in the sector, this is seen to be dropping to around inflation levels over the next few years as affordability is starting to affect the occupier pool, particularly in London and the South East. This is making it increasingly challenging to underwrite deals off the exceptionally low yields which are still being sought by potential sellers.”

UBS’ UK sector outlook will continue tomorrow.

james.wallace@realassetmedia.com