Leading independent property advisory firm, Lismore Real Estate Advisors has released its review of the Scottish investment market for Quarter 3 of 2022.
After a strong post-Covid bounce back, Lismore is predicting more volatility in the market, with caution being the watchword in the short to medium term.
In terms of transaction volumes, the momentum from the first half of the year has not carried through, with quarter 3 seeing circa £339m traded, compared with £612m in quarter 2. Activity for the quarter was some 26% below the five-year average, however the year-to-date position of circa £1.45bn is still significantly ahead of the same period in 2021 (£1.1bn).
Key transactions in the quarter saw the £20m (7.70% yield) sale of Equinor House at Prime Four by Golden Globe Merchants to GG Capital in an improving Aberdeen market. Other deals included the £15.35m sale (6.5% yield) of a prime multi-let retail and office block on Edinburgh’s George Street by BBC Pension Trust to Broadland Properties. In the west, Redevco completed the £9.25m acquisition (8.72% yield) of 11 Minerva Way in Finnieston from a client of CBRE Investment Management. At Eurocentral, prime logistics pricing softened with Threadneedle’s £11.114m sale (5.25% yield) of 5 Brittain Way at Eurocentral to Custodian REIT.
Richard Mackie, Director of Lismore comments: “Signs of a general market slowdown were starting to show pre-summer. Well documented macroeconomic challenges meant investors became cautious and volumes slowed over the summer months. Fast forward a month and add in the “Mini Budget”, subsequent financial markets turmoil and Sterling collapse, it is not surprising that we have seen investor confidence wane, deals stall and values coming under pressure.”
Recently Lismore investor research indicated that 96% of respondents expect to be on the acquisition trail over the next 12 months, albeit with vendor and purchaser pricing aspirations expected to be out of sync. Positively, 100% of property companies and funds view the next 12 months as a buying opportunity.
When asked about market challenges over quarter 4, 51% of respondents view vendor/purchaser pricing aspirations as the key challenge, with 71% of property companies and 60% of investment managers supporting this view. Debt terms accounted for 29% of responses, with over 50% of funds selecting debt as the key challenge. On the construction side, the viability of projects will be brought into focus, with the timing of projects key.
When questioned about average cross sector reduction in values, 42% of respondents believe values will reduce by up to 10% with 44% anticipating a reduction of up to 15%. Only 15% expect values to reduce by 20%+. It was noted that certain sectors, in particular BTR, life sciences and PBSA, may be protected to an extent from the wider market turmoil due to robust fundamentals. Property companies remain the most bullish with 63% expecting values to reduce by up to 10%, whilst 89% of fund respondents expect a reduction of 15%, perhaps indicative of more significant reductions seen in the larger lot sizes.
For an insight in debt markets in the short to medium term, Lismore spoke with David Shaw of Peritus Corporate Finance, who said: “Debt liquidity across most asset classes remains strong, with the exception of the retail sector where challenges have been around for some time and for assets perceived to fall foul of ESG aspirations. Lenders are generally positive on the Big 6 cities for well-specified and well-let offices, but have limited appetite outside of these core locations. Industrial and logistics continue to be sought after by most lenders.
“The market is suggesting that the expectation for the SONIA floating rate could reach 5.92% by May 2023, before falling back and flattening around 3.5% in late 2028. It seems inevitable that refinancing challenges will lead to some investors disposing of assets, but it may not be as bad as feared depending on when you bought the property and if you have been driving income forward.
Richard Mackie concludes: “Looking to the future, there is always a market; it is just a matter of pricing. The challenge will be how quickly can investor confidence return and at what point the current gap can be bridged to create a fluid market. The pricing adjustments will see the canniest investors, who are well-financed and can act with speed become more active in a less crowded market.
“History tells us that markets can bounce back quickly when stability returns – 2023 is likely to be more interesting with a small ray of light in a fairly long tunnel.”