Cushman Q1 UK review: headline volumes down 20% but alternatives record bumper quarter

A total of £11.2bn of UK commercial real estate was traded in the first quarter, according to new data from Cushman & Wakefield, which reflects a 20% decline on the same period a year ago. However, investment volumes in alternative real estate assets – such as hotels, residential and care homes – reached £4.7bn in the quarter.

Cushman reported that the bumper quarter in alternative activity reflects 42% of the overall UK market, in the highest share on record and follows a 29% and 35% share growth in each of the previous two quarters, underscoring the continued demand for assets in these sectors.

Jason Winfield, Head of UK & Ireland Capital Markets at Cushman & Wakefield, explained:

“Investors are looking more broadly at the real estate market and while a flight to alternative assets is typically associated with late cycle strategies, the strength of the interest is unprecedented. The growing understanding and maturity of alternatives as an asset class is proving to be a significant driver for change. We can expect more fund raising for this type of asset this year as investors seek to capitalize on the opportunities available.”

Annualised volumes slowed to £59bn, down from £69bn a year ago. Activity was weaker in the mainstream sectors – office, retail and industrial. Volumes in residential and hotels held up in line with trends last quarter.

According to the MSCI monthly index equivalent yields across all sectors moved out over the first quarter with the All Property yield moving out 5 bps to 5.86%. The biggest swing was in retail (+13bps to 6.27%) and residential (+12bps to 5.31%). Both offices and industrial saw swings of less than 2bps. On an annualised basis most markets continue to show compression in yields – retail the exception.

Prime yields flatlined in most sectors, according to MSCI data, although no markets saw an inward movement in a clear sign that the we are at an advanced stage in the current cycle, Cushman reported in its analysis.  The average prime UK all property yield moved out 11bps to 4.74% and is now higher than in five other European markets. With a more marginal outward shift in secondary yields measured by MSCI, the gap between prime and secondary narrowed further to 111 bps.

Nigel Almond, Head of Data Analytics – EMEA Research at Cushman & Wakefield, explained:

“Uncertainties in the wider market sent gilt yields lower increasing the gap to property. With interest rates expected to remain lower in the near term we expect prime yields remain stable in most markets during 2019 as investors focus on better quality assets.

“The exception being retail where we generally expect some modest outward shift across the majority of markets – this is symptomatic of wider concerns over increased vacancies and expectations of weaker or negative rental growth as the sector grapples with changing consumer habits. With uncertainty in the market set to persist in the near term we see investment activity focussed on better quality assets, with longer term secure income. As a result, we expect the gap between prime and secondary to widen on the back of a greater outward drift in secondary yields.”

james.wallace@realassetmedia.com