Hotel & leisure sectors perform best as Q1 investment dips back below £10bn

The UK investment market began 2024 in relatively subdued fashion, with Q1 volume slipping back below the £10bn mark, according to LSH’s UK Investment Transactions (UKIT) Report.

£9.9bn worth of UK property assets changed during the quarter, down 9% on Q4 2023. Volume was 17% below the five-year quarterly average, but a modest 5% up on the same quarter of last year.

The living sectors were a major driver of overall volume, with £4.6bn of assets changing hands in Q1. This represented 47% of total investment, living’s second-highest market share on record. While strong demand for BTR and PBSA assets continued to underpin overall living volume, it was the hotel & leisure segment that shone brightest in Q1 with volume surging to a five-year high of £1.7bn.

Unusually, Q1’s two largest deals were both hotel transactions. Starwood Capital purchased a ten-hotel portfolio from Edwardian Group for c. £800m, while MCR Hotels bought the BT Tower, London for £275m and will convert it into a hotel. Travelodge’s £210m acquisition of 66 hotels from LXi REIT also contributed to a stellar quarter for hotel investment.

Following a record 2023, momentum was also maintained in the BTR sector in Q1, with volume of £1.4bn. While this was 10% down on Q4 2023, it was still one of the best quarters on record for BTR. Q1’s standout deal was KKR’s £250m acquisition of two stabilised assets at Wembley Park from Quintain; while a further boost came from continued activity in the fast-growing single family housing (SFR) segment.

While hotels and BTR were the main drivers of living activity, other segments also made notable contributions. Large-scale transactions included Clariane’s £207m sale-and-leaseback of 11 care homes; and Aviva’s £150m acquisition of six PBSA assets.

Retail was the only one of the more traditional core commercial sectors to record above-trend volume in Q1, with £1.7bn transacted, 20% higher than the five-year average. Remarkably, retail volume surpassed both office and industrial for the first time since Q1 2011.

The largest retail deal of the quarter was Blackstone’s £230m purchase of 130-134 New Bond Street, W1, comprising 31,000 sq ft of luxury retail space. This contributed to a total of £1.3bn invested in the shops segment, 74% of all retail investment and nearly double the quarterly average. Conversely Q1 investment was down on trend for both shopping centres (-15%) and retail warehouses (-54%).

Industrial volume of £1.6bn was 21% up on Q4, but still 32% below the five-year average. The sector’s most noteworthy deal saw Ares Management acquire a 1.2m sq ft portfolio from Royal London Asset Management for £212m. However, large-scale industrial transactions were otherwise thin on the ground, with only one other deal in excess of £100m.

The struggles of the office sector intensified in Q1 with investment dropping to £1.7bn, down 36% on the previous quarter and 55% below the five-year average. Q1 was the second weakest quarter in the last 15 years, with only the pandemic-afflicted period of Q2 2020 seeing a lower office volume.

Central London was home to the only two £100m-plus office deals of the quarter. The larger of these saw Royal London Asset Management acquire a 50% stake in 1 Triton Square, London, for £193m, forming a JV with British Land to reposition the asset as a life sciences hub. However, with large-scale transactions otherwise in short supply, Central London office investment slipped to £1.0bn, 30% down on Q4 and 58% below the five-year average. Regional markets fared little better against trend, with South East offices (-50%) and Rest of UK offices (-38%) both well down on their respective quarterly averages.

While overseas buyers remained the most active investors into UK property, cross-border inflows slipped to £3.5bn, down 34% on Q4 2023. This was despite investment from North America rising by 26% to £2.5bn, nearly a third of which came from Starwood’s £800m hotels deal. Investment from all other global regions was well down on the previous quarter.

Nonetheless, overseas investors were the only major net buyers of UK property in Q1, to the tune of £2.4bn. On the domestic front, the REITs continued their sell-off in Q1, with near-record net disposals of £1.4bn; while institutions were also net sellers for an eighth successive quarter, albeit by a more modest £700m.

Ezra Nahome, CEO of Lambert Smith Hampton, commented:

“Though sentiment has improved markedly from where we were six months ago, many investors remain understandably content to sit on their hands.

“Wide expectations that better times lie ahead, in the form of falling interest rates and improving economic conditions, is proving to be something of a double-edged sword with the market seemingly stuck on amber. An uncertainty to commit has not been helped by fluctuating signals in the global economy and geopolitical environment.

“However, with the period of price discovery now essentially done with, now is perhaps the best opportunity to strike a deal, with expectations of falling interest rates set to drive a degree of yield compression later in the year. Offices and long income index-linked assets are starting to appear mispriced, and hence these areas arguably offer some good opportunities in the short term”.