Investment Quarterly Q2 2024

Investment in UK commercial property picked up in Q2 2024 across all but one of the main sectors, with activity in the retail sector seeing a notable contraction quarter-on-quarter.

Source: Carter Jonas, RCA, CoStar

£9.6bn was traded in Q2 2024. This was 13% up quarter-on-quarter, 8% up year-on-year, but 27% below the five-year quarterly average. The rolling annual total was marginally above the previous quarter, but was 34% below the five-year average of £54.bn.

Source: Carter Jonas, RCA, CoStar

Approximately 33% of all investment (excluding multi-regional portfolio deals) occurred in the capital in Q2 2024, which is below the five-year average of 51% and the 45% share recorded in the first quarter. Investors targeted assets in the living sectors, such as hotels and built-to-rent, but also retail assets in prime locations. Overseas capital continued to support volumes in London, accounting for 57% of the total.

Conversely, investment in the regional markets (UK excluding London) accounted for 67% of the total, above the 55% recorded in Q2 2024. The South East region recorded the highest level of investment outside the capital, with circa £830m purchased in Q2 2024, followed by the East Midlands with just under £500m.

Source: Carter Jonas, RCA, CoStar

The alternative sectors accounted for the largest share of the quarterly UK total at 52% and recorded volumes closer to the five-year quarterly average than any other sector. The industrial sector accounted for 18% of the total, whilst offices amounted to just 17% and retail accounted for 12%.

Source: Carter Jonas, RCA, CoStar

Office

Office investment volumes picked up marginally to £1.7bn in the second quarter, up 4% quarter-on-quarter, but 56% below the five-year quarterly average, as spending on large offices continue to be muted. No deals above £200m were recorded in Q2 2024, with only two deals on or above £100 million completed.

Some of the quarter's largest deals were in London. The UK-based investor LetterOne acquired 20 Grafton Street for circa £100m, while Titan Investors purchased 63 Clerkenwell Rd for £77.4m, reflecting a net initial yield of 4.9%.

Despite the overall weaker investment outside London, there were some large transactions outside the capital. Scotland recorded some of the largest deals in the second quarter. Corum acquired 1 West Regent Street in Glasgow for £46.5m, reflecting an 8.8% net initial yield, while the Menomadin Group purchased Annan House in Aberdeen for £32m, reflecting a net initial yield of 10.5%.

Industrial

Industrial investment increased by 12% quarter-on-quarter in Q2 2024 to about £1.8bn. Despite the recent uptick, volumes were 44% below the five-year quarterly average. The largest deal was KKR’s acquisition of Royal London Asset Management's 33.6 acres of industrial and logistics assets in Southall, West London, for £315m. Another notable deal was the acquisition of the 310,000 sq ft Heathrow Estate by Kennedy Willson for circa £88m.

Retail

Retail investment dropped in the second quarter. At £1.2bn, retail investment was 21% down on the previous quarter and 37% below its five-year quarterly average. Several sizeable prime retail assets, retail parks, and shopping centres supported volumes in the second quarter of 2024. Blackstone acquired 130-134 Bond Street for £227m, reflecting a net initial yield of 3.5%. 178 New Bond Street and 126 New Bond Street were also sold in the same period for £82m (2.2% yield) and £71m (2.8% yield), respectively. Elsewhere, Warehouse REIT acquired Ventura Retail Park Phase 2 for circa £37m, while Landsec increased its share in Bluewater by an additional £17.5% for £120m.

Alternatives

Spending on the alternative sectors surged in Q2 2024; with £5.2bn transacted, volumes were up 25% quarter-on-quarter, 84% year-on-year and 40% above the five-year quarterly average. Several hotel and built-to-rent deals were completed in the second quarter. For example, Mapletree Investments acquired a portfolio of 31 student accommodation assets, predominately in the UK, for circa £1bn, while a joint venture between Blackstone and Regis acquired a portfolio of 1,750 new-build homes across 36 developments for £580m. Elsewhere, Ares Management acquired a 21-hotel portfolio for £400m, reflecting a net initial deal of 7.5%.

Overseas Investment

Source: Carter Jonas, RCA, CoStar

• Overseas investment in UK commercial property totalled £4.1bn in Q2 2024, up 14% quarter-on-quarter but 27% below the five-year quarterly average. As a percentage of total investment, it accounted for 41%, below the 10-year average of 51.9%.

• US investors had the highest share of overseas investment in Q2 2024, totalling around £2.8bn, broadly in line with the previous quarter but 7% below the five-year quarterly average. Notable deals include Blackstone’s acquisition of a BTR portfolio worth circa £580m and KKR’s acquisition of International Trading Estate for £315m.

• Far Eastern investors, historically among the most active overseas investors in UK commercial properties, ranked second, spending around £1bn, above the 5-year quarterly average of just over £600m. The quarter's largest deal was Mapletree Investments’ acquisition of a portfolio of 31 student accommodation assets for circa £1bn.

The outlook from Ali Rana, Head of National Investment

The market's calm reaction to the election result appears to confirm that it has already priced in the change to a moderate Labour government. That said, it will take time for their manifesto policies to be formalised, and nuances in these could impact market volumes.

While transaction volumes remained muted in a historical context in Q2, market sentiment is now focused on when the market will start to improve rather than on concerns of further disruption. Moving into the summer, market activity is expected to remain slow, but investors are readying themselves for increased opportunities and activity in Q4 2024 and into 2025.

August’s reduction in the base rate to 5.0% will provide a positive signal that the market is improving, and debt costs should start to ease. While it is likely to be gradual, we anticipate that this will result in the beginning of an upward trend in pricing.

The industrial sector has continued to be impacted by a lack of stock, and as a result, transaction volumes remain muted. However, significant investor appetite remains, as demonstrated by the strong pricing recently achieved on some reversionary multi-let and mid-box assets. That said, the stronger evidence being created is somewhat narrow, being focused on opportunities that are of interest to Private Equity and Institutional investors. With a drop in the base rate, we anticipate this will result in greater investor confidence and a narrowing of the pricing aspiration gap between vendors and purchasers that has been present in other parts of the market.

Having undergone a period of price discovery and a softening of yields, with investors generally approaching the office sector with caution, we have identified an increasing number who see significant potential in the sector. The change in Permitted Development rules, removing the size restriction on conversion to residential and coming into effect in August, is also unlocking several more secondary and tertiary assets which remain unviable as offices. As a result, the redevelopment of these assets into alternative uses, such as housing, is expected to increase in the future. In addition, investors are now turning their attention back to greyfield land for potential development, reviving previously abandoned projects.