The Midlands property investment market has reached a point of stability, with the Brexit effect being masked by the broader economic picture.
This is one of the key conclusions from Bilfinger GVA’s latest economic research, ‘Economic and Property Market (EMPR): Post referendum outlook’, which examines how market sentiment and activity has shifted post-referendum, and assesses some of the challenges and opportunities that lie ahead.
Damian Lloyd, Senior Director in the Midlands Investment team, said: “The effect of Brexit is being masked slightly by the broader macroeconomic picture, where international investment has been diverting away from the UK since last year. This was, however, due to solid business reasoning and a greater level of return available elsewhere, rather than concern over the referendum.
“Ultimately, commercial property reached the peak of the cycle in 2015, with some investors calling the market in the summer. This led to quieter than expected transactional volumes in the regions in the final quarter of 2015 and the first half of 2016.
“If you consider all the deals that were completed in the first half of the year, very quickly it totals to around £1 billion of transactions. However, the larger deals, including M&G Real Estate’s £200 million speculative funding of Three Snowhill; the Canadian Pension Plan Investment Board’s acquisition of a £75 million, 50% stake in Paradise and Hammerson’s £335 million purchase of Grand Central were all hangovers from 2015.
“We have seen a lot of quite positive smaller transactions of between £5 million – £15 million. There was a little softening in pricing which stabilised quite quickly, providing a good investment base. This softening affected secondary stock more than prime, which saw little to no impact.”
Bilfinger GVA believes that the market has reached a point of relative stability and there is unlikely to be a backslide.
Damian Lloyd continued: “Property is a tangible asset and the market has reached a point of relative stability. It’s a slow and steady year but you can definitely find a buyer if you want to sell your assets.”
Properties in the West Midlands have seen their yields remain relatively stable however while the distribution market has barely missed a beat, the out of town business park sector has seen a greater impact on their valuations.
Key headlines from the research:
The UK economy was growing at a healthy rate in the run-up to the EU referendum, rising by 0.6% in Q2 (in line with the long-term trend), up from 0.4% in Q1. A marked slowdown in growth is expected during the second half of this year although given post-referendum survey evidence, a major recession seems unlikely. However a technical recession (two quarters of declining output) remains possible, which would adversely affect confidence.
The latest ONS figures report that total UK construction output was flat in July, with new construction work rising by 0.5%. This suggests that the sector was resilient during the initial post-referendum period, but these figures can be quite volatile from month to month, so should be treated with caution. There is now less certainty over future occupier demand, so it is likely that development activity will fall as schemes are put on hold. This will vary across sectors, reflecting the outlook for demand.
A total of £3.1 billion of transactions occurred during July and August – a monthly average of just £1.5 billion. More than £8 billion was transacted over the same period last year. Sterling’s depreciation is already making the UK a more attractive place for overseas buyers, and this will benefit the investment markets in London and the key regional cities. Almost half of the value of purchases so far in Q3 has been from overseas buyers, up from 42% during the first half of the year.
Gerry Hughes, Chief Executive at Bilfinger GVA said: “Recent weeks have seen relative stability across the financial and property markets, however businesses need certainty. Whilst the Government has confirmed its intention to trigger Article 50 in March, it needs to clarify its wider approach to the vast range of complex issues, which we hope will be addressed in the Autumn Statement. At the Tory party conference, the Chancellor highlighted that the productivity gap between London and our second, third and fourth cities is greater than in any other major economy in the world. Now more than ever before, it is crucial that this is rectified not by restricting the growth of London, but by enabling the full economic potential of these core cities to be realised.”