Capital Economics: further UK investment activity softening expected after April volumes fall 40%

UK investment volumes in April were down 40% month-on-month and year-on-year at £2.3bn, according to data from Property Archive, reinforcing the downward underlying trend in investment activity over the first quarter.

A total of £11.2bn of commercial real estate was traded in the first quarter of the year in the UK, according to Cushman data, some 20% lower on the same period a year ago. A lack of stock twinned with Brexit-related caution saw activity in the mainstream sectors – office, retail and industrial – weaken 39%.  In turn, the underlying trend, as implied by the 12-month average, remains downwards.

Capital Economics forecasts that activity softening was not a surprise given that the extension of the Brexit deadline until October, which has prolonged investor uncertainty. Indeed, with uncertainty prolonged and pricing concerns apparent, particularly in the retail sector, Capital Economics suggests investment activity could soften further this year.

The value of deals completed in London was weak in April, following on from a strong March. Capital Economics notes that the small improvement in London investment activity towards the end of last year appears to have reversed. However, investor sentiment towards property in the ‘rest of the UK’ segment has been affected more. On an annual basis, investment outside of London has fallen by 30% since its peak in February last year.

Overall, the value of deals completed over the first four months of the year is more than 50% below the total over the same period last year. Although investment in alternative property is expected to hold up slightly better, Capital Economics forecasts that investment activity in traditional sectors will soften further this year leading to a reduction in overall activity.

Amy Wood, Property Economist, at Capital Economics explains:

“Admittedly, there were some encouraging details in the data. For example, there was a notable improvement in net investment from overseas investors in April, which had softened in the lead up to the original Brexit deadline.  In addition, despite the fact that all-retail rental values are falling and yields are increasing, there was a rise in the value of retail deals completed. Indeed, retail deals totalled over £800m, almost double the 12-month average. The total was boosted by the sale of 12 Sainsbury’s stores by the British Land joint venture with Sainsbury’s.

“But these monthly movements were not enough to change the bigger picture. Indeed, with the exception of investment from overseas, net investment from other buyer types was weak. Further, on an underlying basis, the share of purchases made by overseas investors remains below 50%, which was the average share experienced over the past five years or so.

“And across all the traditional sectors, the trend in investment activity remained soft. In particular, after showing some signs of stabilisation in March, the value of office investment deals completed in April was around 40% of its 12-month average. • In contrast to the softening in activity in traditional sectors, alternative investment has held up better, albeit at flat levels.  

“Nevertheless, with interest rates set to remain at historically low levels until later next year, we think that investors’ search for yield will continue to support alternative investment activity.”

james.wallace@realassetmedia.com