The investment market slumped in the final quarter of 2022, but the speed of the correction provides a platform for improving activity in 2023, according to Lambert Smith Hampton’s (LSH’s) latest UK Investment Transactions (UKIT) report.
Just £7.3bn of property assets changed hands during Q4 2022, down 41% on Q3, 44% below average and the weakest out-turn since the lockdown-afflicted quarter of Q2 2020. Investment volumes in Q4 2022 contributed to a respectable total of £54.1bn for the year as a whole, with 2022 being very much a ‘game of two halves’ due to the mid-year shift in financial conditions. Investment activity in the second half of 2022 was down 43% on the first half of the year.
The smaller end of the market held up notably better in Q4 than the larger end. Q4 2022 saw only ten transactions in excess of £100m, far removed from the 50 seen in Q1 2022 and 60% below the quarterly trend. Meanwhile, activity in the sub £20m bracket – where reliance on debt is typically less important – was relatively more resilient in Q4, with the number of recorded deals 34% below trend.
Two of Q4’s three largest deals involved supermarket chains as the buyer: Asda purchased a portfolio of 132 petrol stations from the Co-op for £600m; while Tesco opted to buy Cambridge University Endowment Fund’s share across seven of its stores for £500m. Q4’s other deal of similar magnitude was Invesco Real Estate’s £600m JV funding agreement with Related Argent for a major residential-led mixed-use scheme in Brent Cross.
Notably, for the first time in over seven years, retail was the strongest performer for volume against trend of the core asset classes in Q4. Retail volume hit £1.6bn, 14% above the five-year quarterly average. However, this was dominated by two substantial including Tesco’s JV buy out and Fenwick’s £430m sale and leaseback agreement of its flagship store on New Bond Street, W1 with Lazari Investments.
Of all the sectors, buying aversion centred most of all on offices. Total volume slumped to £1.3bn in Q4 2022, down 88% on the previous quarter and the second weakest outturn on record after the pandemic of Q2 2020. Central London bore the brunt of this, however, with record low volume of £310m comprising just a handful of recorded deals, the largest by a distance being Wirtgen’s Group’s £190m (3.85% NIY) acquisition of 50 Finsbury Square, EC2.
While no sector has been spared from pricing correction, ongoing global appetite for life sciences remained the one clear bright spot for offices amidst the wider malaise in Q4. Volume of life-sciences-linked assets amounted to circa £500m and included Q4’s largest office deal, namely Brockton Everlast’s £200m acquisition of 1, 2 & 26, Cambridge Science Park (5.00% NIY) from TusPark. Remarkably, Cambridge by itself accounted for one third of total UK office volume in Q4.
Meanwhile, the long, strong run for industrial volume came to an abrupt end in Q4, with volume of £1.6bn being just half Q3’s level and 33% below trend. However, this mostly reflected an absence of the especially large portfolio deals that were synonymous with the recent boom. Aided by repricing, there remains a depth to demand in the sector thanks to ongoing growth expectations – Q4 saw 99 recorded deals, only circa 25% down on the post-pandemic boom of the past two years.
All the main buyer types were much less acquisitive in Q4 compared with trend. Total overseas buying more than halved from Q3 to £2.9bn in Q4, and made up only 39% of total volume, the lowest share since Q2 2020. That said, overseas investors were the only clear net buyers of UK property in Q4, to the tune of £2.1bn, dominated once again by inflows from North America.
On the domestic front, quoted property companies were the least acquisitive buyers against trend in Q4, with total purchases of £493m being 63% below trend. Unsurprisingly, given growing pressure to reweight their portfolios, institutions were the biggest sellers in Q4, disposing of £1.7bn of assets, almost half of which involved the still relatively liquid industrial sector.
Reflecting a sharp recalibration of pricing across the market, the All Property average transaction yield moved out by 48bps in Q4 to stand at 5.59%, putting average pricing broadly back to the pre-pandemic position. Sector-wise, industrial saw the sharpest outward movement, with the average transaction yield shifting up by 131bps to a two-year high of 5.01%. Meanwhile, somewhat counterintuitively, the average office transaction yield moved in by 20bps in Q4 to 5.58% (albeit following a sharp outward movement in Q3), a result swayed to some extent by activity in the life sciences space.
Ezra Nahome, CEO of Lambert Smith Hampton, commented: “Despite the economic challenges, the financial turbulence of last year has quickly given way to a more stable environment in which deals can be done. For quality assets, the rapid bout of repricing that we saw in the latter part of 2022 has almost run its course, aided by more certainty around the path of interest rates.
With plenty of dry powder to deploy in the market, from both domestic and overseas sources, refinancing pressures are likely to generate a host of buying opportunities in the coming months, driving a resumption of stronger transactional activity in the second half of the year. Volume is anticipated to hit circa £48bn in 2023, around 10% down on 2022, but largely also reflecting the downward shift in pricing as opposed to activity.
However, with recession looming, investors will understandably be wary of a downturn in occupier demand and securing income is now fundamental. Given growing structural and environment obsolescence risks in some parts of the property market, in particular offices, the correction in values for secondary assets may have further to run to allow for repositioning and repurposing of these assets.”