Commercial Property Market Commentary Q4 2019
18 December 2019
"Market fundamentals remain strong despite uncertainty" - Claire Madden, Managing Partner, at Connection Capital and Dominic Wright, Director at Riverside Capital.
- Deal volumes slowed last year but tenant demand and valuations remain resilient
- Pent-up demand is positive for the market
- London offices, logistics hubs and “alternative” sub-sectors are key areas of focus
2019 has been the year of wait and see in UK commercial property. After a couple of extremely busy years, where we saw exceptional volumes of deals being transacted, it’s perhaps hardly surprising that some of the heat has come out of the market. Investors, especially those from Asia who have recently poured so much money into the sector, have pressed pause on activity, at least until the economic outlook, and in particular the state of play on Brexit, was clearer.
Tenant demand and valuations hold up well
However, underlying market fundamentals have stayed positive. Tenant demand has remained strong across all sub-sectors, with the exception of retail, bolstered by a shortage of good quality office, industrial and leisure space. London is always a good barometer and therefore, while we have not quite achieved the 1million square foot per month new lettings average that the industry has been used to in recent years (roughly equal to two Gherkins each month), it’s not far off.
Valuations have also held up well. So although investment has slowed, there has been no real distress in the market. Retail investors may have started to pull capital from open-ended funds that have now been gated, amid concerns over Brexit and the woes of the British high street, which is expected to prompt some earlier-than-expected asset sales. But sophisticated, seasoned investors, who tend to take a longer-term view (and have well-diversified portfolios), have a more sanguine attitude.
If there is anything positive to come out of the problems these funds are having, it’s that hopefully there will be a push to protect retail investors better by ensuring that investment structures properly match the nature of the underlying assets they hold. As many people are now frustrated to find, the offer of daily liquidity from inherently illiquid assets is a major flaw in property fund business models. The rationale for closed-ended structures for these types of investments is becoming more and more obvious.
Pent-up demand from investors may now be released
Now that the general election is over, greater certainty over the political agenda and the direction of travel regarding the UK’s EU exit should be positive for the market. An uptick in confidence would release much of the pent-up demand that we believe is out there from domestic and overseas investors. As that happens, increased dealflow should create a virtuous circle by improving transparency over valuations, and that in turn boosts confidence further.
In the coming year, we have several potential portfolio exits in prospect, assuming the conditions are right. As ever, it will be a question of timing the market before making any final decisions.
London, logistics and the appeal of “alternative” options
In terms of investment opportunities, for us the main areas of focus are London offices which are likely to remain a solid long-term performer, as well as logistics and distribution assets, which are in high demand due to the relentless growth of e-commerce.
In addition, alternative options, such as student housing or laboratory space, are highly attractive, not least because they offer the benefit of diversification within real estate portfolios. Such assets are not subject to the same trends and drivers as other parts of the market, and may, therefore, help smooth out returns, whatever else is happening in the wider environment.
The commercial property market remains highly competitive and it takes a strategic approach as well as excellent credentials to secure the best deals. After a muted end to the decade in investment terms, the signs are that the next one could start with a bounce. We’re ready.