FBE Traditional Review of the Year With David Smeeton of Colliers
1. Moving towards a new phase in the cycle
sponsored by
Yields compress at fastest rate in five years
UK Commercial Property
Investment Review Q3 2014
2. CoStar Group
Table of Contents
Overview......................................................................... 3
Major Events (Q1 -Q3 2014)............................................. 4
Key Transactions in Q3 2014............................................. 7
Highlights from CoStar Data............................................ 8
Retail on the Upswing...................................................... 9
Majority of Investment Flows into Regions........................ 10
Foreign Investment Spreading Beyond London.................. 11
East Asian Capital Flocks to UK Real Estate....................... 12
Yields Below Five-Year Averages in All Sectors.................... 16
Are Strategies Starting to Shift?....................................... 17
League Tables: Familiar Faces at the Top........................... 18
League Tables: Spotlight on Single Branch......................... 19
Data, Analytics and News Have Come Together............... 21
Get in Touch with CoStar................................................. 23
Every effort has been made to ensure the accuracy of the information
held within this report. The publisher cannot accept liability for any loss/
damage which may arise as a result of any error or omission of any data.
Any data reproduced from this analysis must be accredited to CoStar.
3. Investment Review Q3 2014
3
Key Figures
£15.2bn
invested in UK commercial
properties in Q3 2014 up 20%
on Q3 2013
£4.5bn
invested in the retail sector
a 54% increase from
Q3 2013
6.97% average all
property yield
its lowest level
since Q2 2010
55% of total volume invested outside London
the joint highest
share since Q1 2011
£2.5bn
invested in “Big Six” regional cities over the
last year
up 150%
on the previous 12 months
Overview
UK CRE investment is set for its strongest year
since 2006, propelled by another strong quarter
of trading in Q3 2014. Investment totalled £15.2bn
across 750 transactions, a jump of 20% Y-o-Y.
Assuming the average Q3 to Q4 uplift is consistent
with the previous four years’ results, UK CRE
investment is projected to top £62bn in 2014, the
highest annual total since 2006.
share of investment again in Q3 with 40% of all
investment, the quarter was notable for the weight
of capital ploughed into the UK’s retail sector, and
retail warehouses in particular. Investment in this
subsector quadrupled Q-o-Q to £1.6bn, by far the
were also popular in Q3, with more than £1 billion
traded in this sector for only the second time in the
last seven years.
In a continuation of the recent trend, investment
outside of London strengthened further in
accelerating economy, improving market
pricing in London. As in Q2, 55% of investment
found its way into the regions (excluding multi-region
portfolios), the highest percentage since Q1
2011.
The sheer weight of demand is pushing down yields
across the board. The average all-property yield
tumbled another 57bps over the quarter to 6.97%,
its lowest level since Q2 2010. However, with yields
in all property sectors, rental growth will need to
replace sentiment as the primary driver of capital
value growth over the next 12 months. The time
for picking up well-let assets and waiting for yield
compression to drive values looks to be at an end.
4. CoStar Group
£ £ £ £ £ £
116.9
4
Major Events
Investment
January February March
Leasing &
Development
+
Economic
Sentiment
130
126
122
118
114
110
106
102
98
- 94
90
Hyperion Portfolio
(55 properties) bought by
Legal & General for £556.5m.
It is the largest portfolio
sale of Q1.
Westfield sells stakes in
three shopping centres
(Merry Hill, Derby,
Sprucefield) to Intu for a
combined £868m.
The £1.7bn sale of
More London to St Martins
completes.
The joint highest UK property
transaction of all time.
Apollo Global Management
buys Aviva's Project Moon
portfolio for £352m at
11.2% yield.
US investor Hines, on behalf
of a German pension fund,
purchases Sixty London,
EC1, for £245m at 4.75% yield.
The building was fully leased
to Amazon in 2013.
Union Investment buys
One Snowhill in Birmingham
for £125m at 6.2% yield.
M&G goes under offer
on a 300,000 SF pre-let
of 120 Fenchurch Street
in London's City Core,
in the latest sign of
strength in the City's
occupier market.
Asda leases 310,000 SF
distribution warehouse in
Belvedere as retailers
continue to drive demand
for logistics.
EY pre-lets 205,000 SF at 25
Churchill Place in London
Docklands. EY will pay
£48.50/SF and relocate from
Becket House in London's
Southbank in 2015.
Barclays Bank takes
81,000 SF at 4 Piccadilly
Place in Manchester's
largest leasing deal for
a year.
Developers reveal that two
prominent, hitherto-stalled
shopping centre developments -
Westgate in Oxford and
Victoria Gate in Leeds -
will begin construction soon.
Wave of spec industrial
plans announced with
IM Properties’ 54,000
SF in Solihull, SEGRO’s
93,000 SF in West
London, and Prologis’
340,000 SF in
Northampton and
140,000 SF at Heathrow.
115.9
100.9
UK Sentiment Eurozone Sentiment 100 = Long term average
After four years of falling real wages,
rises in earnings matched inflation,
which fell further.
112.8
101.2 102.4
UK inflation rate falls to
1.9%, below the Bank of
England's 2% target for the
first time since 2009.
Consumer confidence
turns positive for
the first time since
March 2005.
Unemployment figures show
a further drop to 7.2% in the three
months to December 2013.
OECD forecast: UK to grow by
0.8% in Q1 and Q2, outpacing
US, Japan, and Germany.
Economic Sentiment Source: European Commission
5. Investment Review Q3 2014
118.5 120.7
M&G Real Estate
purchases a Sainsbury's
store in East Dulwich for
£68m at a 3.95% yield in
the largest supermarket
trade of Q2.
102.7 102
5
130
126
122
118
114
110
106
102
98
94
90
Investment
April May June
Leasing &
Development
+
Economic
Sentiment
-
£ £ £ £ £ £
119.5
102
SWIP agrees a £92m deal to
forward-fund 167,000 SF of
speculative office space at
12 Hammersmith Grove in
West London. Completion
due in Q1 2016.
UK Sentiment Eurozone Sentiment 100 = Long term average
UK economy expands
by 0.9% in Q2, as GDP
finally edges above
its pre-crisis peak.
Economic Sentiment Source: European Commission
Legal & General Property
forward-fund new Waitrose
distribution centre in Milton
Keynes in a £114m deal at a
yield of just 4.64%.
Big month for London:
Blackstone under offer on
Alban Gate in the City for
£300m, while Tishman
Speyer acquires 33 Holborn
for £311m.
FCA signs 425,000 SF
pre-let at Stratford's new
International Quarter. FCA
will move in 2018 and be
joined by TFL, which
agreed a 250,000 SF
pre-let.
Work starts on the 1.06m
SF A14 Central distribution
centre in Northamptonshire
following a major pre-let to
an international retailer.
Following intense bidding,
Land Securities buys Lend
Lease's 30% stake in the
Bluewater shopping centre
in Kent for £696m,
reflecting a yield of 4.10%.
10 Upper Bank Street in
London's Docklands
bought by China Life, Qatar
Holding and Canary Wharf
Group for £795m in the
largest deal of Q2.
Estée Lauder pre-lets the
entire 152,000 SF at 1
Fitzroy Place in London's
West End in the West End's
biggest deal since 2011.
Japanese bank Mizuho
pre-lets 193,000 SF at
Two New Ludgate in the
City in a strong month for
London leasing.
Law firm Slater & Gordon
completes major Manchester
HQ move, leasing the entire
104,000 SF at 58 Mosley Street.
London's Southbank set
for building boom as
1.45m SF Shell Centre
and 1.42m SF Elizabeth
House schemes given
green light. Carlyle
Group also launches
Bankside Quarter.
Service sector confidence
rises to its highest level
since June 1998.
A record 345,000 jobs were added
in the three months to April,
bringing the UK unemployment
rate down to 6.6%.
BoE Governor Mark Carney gives
a strong indication that interest
rates will rise before the end of
the year, ahead of market
expectations.
6. CoStar Group
£ £ £ £ £ £ £ £
NFU Mutual buys
Manchester's Chancery
Place for £57m at a
5.1% yield, as investor
interest in the regions
starts squeezing yields. Taiwanese investor Cathay
6
Major Events
Investment
July August September
Leasing &
Development
+
Economic
Sentiment
130
126
122
118
114
110
106
102
98
- 94
90
100.6
UK Sentiment Eurozone Sentiment 100 = Long term average
Economic Sentiment Source: European Commission
Life makes its UK debut
with the £320m
acquisition of Woolgate
Exchange in the City of
London.
Capital & Regional
buys 63% stake in
Aviva and Karoo's The
Mall Fund for £213m.
CTP and Development
Securities begin work on 3
St Paul's Place, Sheffield's
first spec office since the
recession.
JP Morgan prepares to sell
Riverside South in
Docklands, once
earmarked to become its
European HQ and one of
London's largest schemes.
SWIP acquires BT's Magna
Park distribution centre
from receivers for £45.4m at
a 5.1% yield. M&G acquires Two
Snowhill in Birmingham
for £140m at a 6% yield,
in a further sign of
investor interest in the
UK's regional cities.
Havas leases 164,000 SF
at King's Cross in
London's largest office
deal of the quarter. Havas
will consolidate staff from
24 offices across London.
In the largest office letting in
Scotland, Abstract signs
Norwegian firm Aker ASA to
335,000 SF at Aberdeen
International Business Park.
Philip Morris Ltd takes final
34,000 SF at 10
Hammersmith Grove, pushing
office vacancy in
Hammersmith down to a
10-year low of 4.1%.
Amazon signs for a 1m SF
mega-shed at the Royal
Oak Distribution Centre in
Daventry, paying £4.50/SF.
It is the second-largest
industrial deal of the year.
117.4
102.2
116.3 115.4
99.9
Scotland votes against
independence by 55% to
45%, restoring confidence
in the UK economy.
Sterling hits a six-year high against the
dollar, amid growing expectations of an
interest rate rise before the end of the year.
UK unemployment falls below 2
million, with the unemployment
rate dropping to 6% in the three
months to August. Phones 4u seeks administration,
placing its 720 stores and nearly
6,000 employees under threat.
Blackstone acquires 125
Old Broad Street in the City
of London for £320m at a
4.9% yield.
Goldman Sachs, GoldenTree
and Avenue acquire portfolio of
144 nationwide hotels leased
to Travelodge for an estimated
£520m in an all cash purchase.
Consent granted for Canary Wharf's 5m
SF Wood Wharf mixed-use
development and ABP/Stanhope's
Royal Albert Dock redevelopment.
7. Investment Review Q3 2014
Key Transactions in Q3 2014
The Pollen Estate, London
Woolgate Exchange, London EC2
Price: £320m
Size (sq ft): 339,303
Sector: Office
Purchaser: Cathay Life
Vendor: TPG Capital & Ivanhoé
Cambridge
Initial Yield: 5.10%
Parc Trostre Retail Park, Llanelli
7
Travelodge Portfolio
Price: £520m
Size: 144 Hotels
Sector: Hospitality
Purchaser: Goldman Sachs,
GoldenTree & Avenue Capital
Vendor: Prestbury Investment,
West Coast Capital,
Aldersgate Investment &
Lloyds Bank
Initial Yield: 6.45%
Price: £381m (64%)
Size (sq ft): 734,611
Sector: Office
Purchaser: The Crown Estate &
Norges Bank IM
Vendor: Church Commissioners
for England
Initial Yield: 1.50%
125 Old Broad Street, London EC2
Price: £320m
Size (sq ft): 323,828
Sector: Office
Purchaser: Blackstone Group
Vendor: Brookfield Property Partners
Initial Yield: 4.90%
Fosse Shopping Park, Leicester
Price: £345.5m
Size (sq ft): 559,117
Sector: Retail
Purchaser: The Crown Estate
& Gingko Tree
Vendor: Abbey Group & Foyleside
Initial Yield: 5.04%
130-137 New Bond Street,London W1
Price: £300m
Price: £300m
Size (sq ft): 42,461
Sector: Retail
Purchaser: Oxford Properties &
Compagnie Financière
Richemont
Vendor: Private Australian Investor
Initial Yield: 2.40 %
Cabot Circus, Bristol
Price: £267.8m (50%)
Size (sq ft): 824,201
Sector: Retail
Purchaser: AXA REIM & Gingko Tree
Vendor: Land Securities
Initial Yield: 6.30%
Price: £155.9m
Size (sq ft): 409,144
Sector: Retail
Purchaser: M&G Real Estate
Vendor: Stadium Retail Investments
Initial Yield: 5.10%
Two Snowhill, Birmingham
Price: £140m
Size (sq ft): 315,750
Sector: Office
Purchaser: M&G Real Estate
Vendor: Hines Global REIT
Initial Yield: 6.00%
8. CoStar Group
Highlights from CoStar Data
• £15.2bn of UK commercial property investment recorded in Q3 2014, a 20% increase from Q3 2013.
• Retail warehouse investment more than quadrupled to £1.6bn, a seven-year quarterly high.
• Multi-region portfolios trades totalled £3.5bn in Q3, the second-strongest quarter since the crisis.
• £25bn invested in the UK regions in the last 12 months, a 70% increase on the previous 12 months.
• Average all property yield compressed 57bps over the quarter to 6.97%, its lowest level since Q2 2010.
• Average all property yields compressed at fastest rate in over five years in Q3.
• Average Central London office yields sunk to a new cyclical low of 4.7%, a drop of 30bps Q-o-Q.
Chart 1: UK Quarterly Investment Volume (£bn)
8
70
60
50
40
30
20
10
0
2009 2010 2011 2012 2013 2014
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Projected
Source: CoStar Group
9. Investment Review Q3 2014
Retail on the Upswing
At 29%, the retail sector accounted for its largest share of volume since Q4
2011, with £4.5bn traded, reflecting a rise of 54% Y-o-Y. Shopping centre
investment slowed to £725m, down from £1.2bn in Q2 and the weakest figure
since Q2 2013. But retail warehouse investment more than quadrupled Q-o-Q
to £1.6bn – by far its strongest quarter since the crisis.
Investment in industrial captured 10% of volume, its average over the past
five years. Whilst total volume in Q3, £1.5bn, fell slightly from Q2, volume over
the past four quarters, £15.7bn, increased 43% over the prior four quarter
sum. Deals outside of London and the South East accounted for 45% of
volume, up from its five year average of 40%.
9
40%
21%
29%
10%
Office Retail Industrial Mixed/Other
Retail
Office again led the way capturing 40% of all investment. The sector’s share
fell sharply from 48% in Q2, but investment of £6.1bn was still the third-highest
quarterly total since the downturn. Outside London and the South
East, office volume surpassed £1bn for the third time in the past year, a level
never reached in the previous five years.
Industrial Office
Chart 2: UK Quarterly Investment by Sector (£bn) Chart 3: Q3 2014 UK Investment by Sector
25
20
15
10
5
Office Retail Industrial Mixed/Other
Source: CoStar Group
Office Retail Industrial Mixed/Other
Source: CoStar Group
0
Q3 12 Q1 13 Q3 13 Q1 14 Q3 14
Office Retail Industrial Mixed/Other
10. CoStar Group
Majority of Investment Flows into Regions
Fifty-five percent of investment poured into the
regions in Q3, in line with Q2’s share, the highest
concentration outside of London since Q1 2011.
(Figures exclude multi-region portfolios).
Investment in the South West nearly quadrupled
Q-o-Q to £744m, the highest volume in over five
years.
Over the past four quarters, investment in the
East Midlands has been nearly double its five-year
quarterly average.
£541m
Yorkshire & H.
10
Chart 4: Q3 2014 Investment Volume by Region
(Total Value & Breakdown by Sector)
`
41%
19% 5
%
24%
5%
30%
36%
31%
15%18%
£553m
North West
2%3%
1%
94%
78%
67%
1%
10%
7%
11%
44%
14%
27%
15%
13%
63%
15%
70%
8%
17%
21%
58%
4%
1%
73%
26%
13%
9%
23% 55%
6%
64%
14%
16%
Office
Retail
Industrial
Mixed/Other
Source: Costar Group
Percentages indicate
% above/below
5-year average
Investment increased 18% Q-o-Q in
Scotland to record its highest annual
total since the downturn, despite the
uncertainty surrounding September’s
independence vote.
£5,331m
London
£1,776m
South East
£691m
Scotland
£516m
West Midlands
£220m
Wales
£744m
South West
£110m
North East
£720m
East Midlands
£396m
East of England
1%
39%
13%
164%
152%
148%
28%
70%
94%
15%
Chart 4: Q3 2014 Investment Volume by Region
(Total Value & Breakdown by Sector)
Chart 5: Quarterly Investment Volume (£bn)
Office
Retail
Industrial
Mixed/Other
Source: CoStar Group
London & South East Other Regions Multi-Region Portfolio % Other Regions
50%
40%
30%
20%
10%
0%
25
20
15
10
5
0
Q3 09 Q1 10 Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14
London & South East Other Regions Multi-Region Portfolio % Other Regions
Source: CoStar Group
Percentages indicate
% above/below
5-year average
11. Investment Review Q3 2014
Foreign Investment Spreading Beyond London
11
Chart 6: Q3 2014 UK
Investment by Purchaser Region
Chart 7: Q3 2014 London
Investment by Purchaser Region
Chart 8: Q3 2014 UK excl. London
Investment by Purchaser Region
82%
21%
9%
3%1% 5%
UK
N America
W Europe
Middle/Far East
Rest of World
46%
20%
13%
UK
N America
W Europe
Middle/Far East
Rest of World
66%
18%
6%
8% 2%
UK
N America
W Europe
Middle/Far East
Rest of World
Overseas buyers accounted for 33% of UK investment
in Q3, a touch below the five-year average of 35%.
Whilst foreign investment didn’t account for a growing
share of the pie, where capital’s going has been
shifting. The share of foreign capital invested in London
assets peaked at 83% in mid-2013 but has since been
on the decline, and foreign investment is now split
evenly between London and the regions.
Additionally, overseas capital is increasingly branching
beyond the office sector. In Q3, offices captured 51% of
foreign investment, down from the five-year average
of 66%. But the share going to retail grew to 20% in
Q3 (boosted by the sales of 130-137 New Bond Street
and Fosse Park). Investment in mixed-use portfolios
and alternative asset classes expanded to 27%, double
its historical average, led by Avenue Capital Group,
Goldman Sachs and GoldenTree Asset Management’s
£520m acquisition of 144 Travelodge Hotels and
Blackstone’s £450m purchase of the Max Property
Portfolio.
Driven by the two aforementioned deals, the USA was
again the largest foreign purchaser in the UK, a title
it has held in 14 of the past 23 quarters, with £2.2bn
invested in Q3, up 35% on its Q2 volume.
Top Foreign Investor by Country in Q3 2014
Country Investment (£m)
1 USA 2,183
2 China 469
3 Norway 339
4 Taiwan 320
5 Singapore 285
6 France 246
7 Canada 188
UK
N. America
W. Europe
Middle/Far East
Rest of World
Source: CoStar Group
UK
N. America
W. Europe
Middle/Far East
Rest of World
Source: CoStar Group
UK
N. America
W. Europe
Middle/Far East
Rest of World
Source: CoStar Group
12. CoStar Group
East Asian Capital Flocks to UK Real Estate
Chart 9: Quarterly UK Investment by Purchaser Origin (£bn)
Investment (£bn) Share from East Asia
12
Over the past four quarters, sales of UK commercial
property to investors in East Asia hit nearly £5 billion
for the first time ever, or 7% of all UK investment.
Whilst domestic firms still account for the majority
of acquisitions (57%), followed by North Americans
(13%), investment originating in East Asia has
steadily grown from an average of 5% in 2009–13
and is now neck and neck with the Middle East’s
contribution. And all signs indicate that this share is
only likely to increase.
12%
10%
8%
6%
4%
2%
0%
25
20
15
10
5
0
Q1
09
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
Q3
14
Rest of the World East Asia Share from East Asia (4 qtr rolling avg)
Source: CoStar Group
Investors from China and Hong Kong are the
dominant force behind this rising level of investment.
Combined, they have poured just shy of £4 billion
into UK property since 2013, or 42% of all purchases
from East Asia. This past quarter, Hong Kong
developer Nan Fung made its debut acquisition
in London with the £150 million purchase of 50
Bank Street in Canary Wharf, and numerous other
investors from Hong Kong and China—such as China
Life Insurance, China Construction Bank, China
Investment Corporation, Gingko Tree, Fosun Group,
and the Hong Kong Monetary Authority—are all
Interest is Broad… and Growing
13. Investment Review Q3 2014
active in the market, in addition to new entrants
like Bright Ruby. China’s burgeoning middle class,
with its disproportionately high savings rate, has
fuelled the growth of cash-rich insurers and pension
funds. The rise of these firms, alongside ongoing
deregulation of rules preventing Chinese institutions
from investing abroad kick-started in 2013,
underscores China’s increasing activity in the UK.
The Singaporeans are also gaining momentum,
investing £3 billion over the past 12 months, four
times their investment over the prior five years. In
Q3, Temasek made its £175 million London debut
with a 50% stake in MidCity Place just a few months
after opening its London office—at a cyclical record
rent—in St James’s. It’s likely just the start for the
Singaporeans, with Temasek subsidiaries Keppel
Corporation and Mapletree Investments, as well
as Pontiac Land Singaporean, also rumoured to be
eyeing opportunities in the capital.
The Malaysians sprang into action soon after the
downturn, but their activity was concentrated in
mid-2011 to mid-2013, highlighted by the Malaysian
Employees Provident Fund’s acquisition of 12 Spire
Healthcare Hospitals for £700 million in Q1 2013,
and their joint purchase (with SP Setia Berhad and
Sime Darby) of the Battersea Power Station for £400
million in Q3 2012—but activity has waned since.
Chart 10: Quarterly UK Investment by East Asian Country (£bn)
13
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
-
Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14
Malaysia China Singapore South Korea Hong Kong Japan Taiwan Thailand
Source: CoStar Group
14. CoStar Group
East Asian Capital Flocks to UK Real Estate (cont.)
Central London Offices Remain the No. 1 Target
14
Perhaps the most noteworthy addition to the East
Asia investor roster in recent months is Taiwan.
Insurance firm Cathay Life made a splash in London
in Q3 with its acquisition of Woolgate Exchange for
£320 million in the first UK purchase by a Taiwanese
firm. In April 2013, Taiwan’s Financial Supervisory
Commission ruled that insurers seeking stable
returns could invest in real estate abroad, in an
attempt to rein in commercial property prices in
Taiwan, where prime yields in Taipei stand around
2% to 2.5%. While these policy changes only apply
to a small subset of insurance firms and are fairly
restrictive about which properties are eligible, other
large institutions such as Fubon Life are clamouring
for London property, which still looks attractive
compared to pricing at home.
The Koreans as well have had their eyes on London,
as noted by the Q3 purchase by Korean Teachers’
Credit Union (alongside Hong Kong’s GAW Capital
in their fifth partnership) of Exchange Tower in
Docklands for £191 million. The Korean Federation
of Community Credit Cooperatives, Hyundai Asset
Management, Korea Post, National Pension Service
for Korea and Korea Life Insurance, which debuted in
the UK in 2012, all remain active in the market.
And the Japanese, big players in the 1980s and
only moderately active in recent years, may once
again make a name for themselves in London. The
Government Pension Investment Fund, rumoured
to be allocating 5% of its £1.25 trillion fund into
global real estate, is believed to be focusing first on
acquisition opportunities in the UK’s capital city.
Since 2009, the majority of East Asian investment
has targeted the office sector, which captured 50%
of their purchase volume compared to the 44%
of volume it garnered in total over that period.
Conversely, investors from East Asia have so far
been underrepresented in the retail sector, which
captured 23% of their spending, compared to 30%
in the wider market. There have been instances of
Asian capital targeting retail in partnerships, such
as the Crown Estate and Ginkgo Tree teaming up
to acquire Fosse Park for £346 million in Q3, but this
is still a fairly isolated occurrence. With many retail
properties needing asset management initiatives
and no sure guarantee of rent growth, retail
opportunities may be too risky for Asian investors
prioritising wealth preservation.
Important to note as well is
the sheer amount of cash
these firms have. Over
one-third of deals with an
Asian buyer had a lot size of
£100 million–£500 million,
compared to just 3% of
deals overall.
15. Investment Review Q3 2014
No Single Reason Driving the Boom
15
A host of factors are behind this growing wave of
Asian capital. In the case of Taiwan, it is largely
motivated by changing policy and the extremely
low-yielding opportunities available domestically.
But more generally, investors are after London’s
relative safety and promising demographic trends.
London has a highly educated, international
population, which is expected to grow 1.2% annually
over the next five years, in comparison to the 0.3%
annual contraction in Japan expected over the same
period, for example. And with growth slowing down
in the Chinese economy, opportunities there are
becoming less attractive. Overall, the same factors
driving any investors to London—diversification, solid
demographics, healthy property fundamentals,
liquidity, strong financial and regulatory
frameworks—in addition to a few key country- and
region-specific trends, are luring Asian firms to the
capital, and all signs indicate that momentum is
building.
Along those lines, many of the largest retail assets
are located outside of London. Asian buyers have
concentrated 50% of volume in Central London
since 2009, 14 percentage points higher than the
share of investment the capital received in total.
Whilst certain firms are willing to invest in Outer
London (such as China Investment Corporation in
Chiswick Park) and others are venturing into the
regions (e.g., Beijing Construction Engineering
Group in Airport City Manchester), deals outside
Central London tend to be the exception, not the
rule. Moreover, although deals outside the West End
and the City are relatively rare, both Docklands and
the Southbank have seen increasing interest from
Asian investors in the past couple of years.
Important to note as well is the sheer amount of
cash these firms have. Over one-third of deals with
an Asian buyer had a lot size of £100 million–£500
million, compared to just 3% of deals overall. With
existing firms and new entrants’ growing appetite
for London property, the share of capital originating
in East Asia may well expand into the double digits
in the very near term.
16. CoStar Group
Yields Below Five-Year Averages in All Sectors
Chart 11: Average Initial Yield by Sector (Unweighted) Chart 12: Average Yield in London vs. Rest of UK
11
10
9
8
7
6
5
Initial Yield (%)
10
Initial Yield (%) Basis Point Spread
• Average all property yield fell 57bps over the quarter to 6.97%, its lowest level since Q2 2010, reflecting
heightened demand for UK property and improving economic conditions across the UK.
• Retail sector recorded the biggest quarterly fall in average yields, hardening by 88bps to 6.61%. This is the
lowest level recorded since the first half of 2011.
• Greatest yield compression over the last 12 months occurred in the industrial sector, with average yields
400
350
300
250
200
150
100
50
falling from 8.90% in Q3 2013 to 7.40% in Q3 2014, a drop of 150bps.
• Yield gap between London and the rest of the UK narrowed sharply to 250bps. Although still well above the
10-year average (170bps), this is marked turnaround after reaching a peak of 350bps a year ago.
• Yields are now comfortably below their five-year averages in all sectors. Therefore rental growth will need to
replace yield compression as the primary driver of capital value growth over the next 12 months.
Chart 13: Q3 2014 Initial Yield Histogram Chart 14: All Property Yield Heat Map
120 Number of Deals per Yield Bracket
1 2 3 4 5 6 7 8 9 10 11 12 13 14
16
100
80
60
40
20
0
Office Retail Industrial
12.5
11.5
10.5
9.5
8.5
7.5
6.5
5.5
4.5
3.5
Initial Yield (%)
Note: The hotter the colour the more frequent the
transactions at that yield
Source: CoStar Group
— All Property — Office — Retail — Industrial
Source: CoStar Group
— Difference (basis points) — London — UK ex. London
Source: CoStar Group
Office Retail Industrial
Source: CoStar Group
4
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Q3 11
Q1 12
Q3 12
Q1 13
Q3 13
Q1 14
Q3 14
All Property Office Retail Industrial
0
0 1 2 3 4 5 6 7 8 9
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Q3 11
Q1 12
Q3 12
Q1 13
Q3 13
Q1 14
Q3 14
Difference (basis points) London UK ex. London
0
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Q3 11
Q1 12
Q3 12
Q1 13
Q3 13
Q1 14
Q3 14
Initial Yield (%)
17. Investment Review Q3 2014
The robust nature of CoStar’s Q3 Investment Review means we can
be confident that 2014 will chalk up the largest level of investment
in commercial property in the UK since 2006. Investor demand is
strengthening in all sectors and regions creating a feeling that there may
never be a better time in this cycle to cash in and sell.
Take Manchester’s office market as an example. Last year the investment
market was dominated by German and Swiss funds. This year the UK
institutions have returned in a big way to provide competition with both
M&G and NFU Mutual, for instance, buying trophy headquarters buildings
for near 5% yields. In response, there has been a sharp uptick in assets
formally on the market, but equally landlords are receiving a major
increase in informal approaches. “Manchester is for sale just now” is a not
uncommon refrain.
Tellingly there has been a marked increase in portfolio sales. Multi-region
portfolio trades were at £3.5bn in Q3, the second-strongest quarter since
the crisis. Private equity interest in building sizeable business parks or
industrial portfolios is encouraging the trend, but it is spreading to the
high street too. Local Shopping REIT is in the process of selling its final 387
assets as Project Renouvier, following its success in selling the forerunner
Project Minard earlier this year.
Perhaps most encouragingly, vacancy rates on the high street are back to
pre-recessionary levels in the stronger locations as town centres reinvent
themselves as more fluid places, benefiting from pop-up shops and more
residential.
There are mutterings that the benign environment for UK property is
leading people to sit a little too much on their laurels and not face up to
some gathering storms. As our Q3 review points out, yields are now below
the five-year average in all sectors, so there will need to be rental growth
and strong asset management to drive capital values going forward. For
2015 to be the success story it has been for so many in 2014, it is likely the
industry will have to work just that bit harder.
17
Are Strategies
Starting to Shift?
HSBC Tower, London E14
Price: c. £1.1bn
Size (sq ft): 1,100,000
Status: On Market
Vendor: NPS
30 St Mary Axe, London EC3
Price: c. £700m
Size (sq ft): 516,000
Status: On Market
Vendor: Deloitte (Receivers)
3 Hardman Square, Manchester
Price: c. £93m
Size (sq ft): 182,979
Status: On Market
Vendor: Credit Suisse
Written by Paul Norman
Editor, CoStar News
18. CoStar Group
League Tables: Familiar faces at the Top
18
Investment Agents - Vendor Q3
Vendor Agent Value £m
1 CBRE 2,644
2 JLL 1,918
3 Savills 1,693
4 DTZ 846
5 Knight Frank 591
6 Eastdil Secured 507
7 Cushman & Wakefield 456
8 Capital Real Estate Partners 401
9 Morgan Williams 349
10 GM Real Estate 342
11 Strutt & Parker 307
12 Colliers International 290
13 Christie + Co 186
14 Michael Elliott 181
15 Lewis & Partners 177
Investment Agents - Acquisition Q3
Acquisition Agent Value £m
1 CBRE 1,289
2 JLL 907
3 Savills 766
4 Colliers International 704
5 BNP Paribas Real Estate UK 679
6 Knight Frank 606
7 GVA 427
8 Cushman & Wakefield 399
9 Wilkinson Williams 371
10 Lunson Mitchenall 319
11 Allsop 301
12 Harper Dennis Hobbs 300
13 Dowley Turner Real Estate 265
14 DTZ 263
15 Michael Elliott 254
Source: CoStar Group Source: CoStar Group
19. Investment Review Q3 2014
League Tables: Spotlight on Single Branch
Source: CoStar Group Source: CoStar Group
19
Single Branch Agents - Vendor Q3
Vendor Agent Value £m
1 Eastdil Secured 507
2 Capital Real Estate Partners 401
3 Morgan Williams 349
4 GM Real Estate 342
5 Michael Elliott 181
6 Lewis & Partners 177
7 Tudor Toone 173
8 Dowley Turner Real Estate 108
9 BCM Real Estate 94
10 Edgerley Simpson Howe 58
11 Fawcett Mead 53
12 Cradicks Retail 52
13 Whitmarsh Holt Young 51
14 Wilkinson Williams 50
15 Farmer Capital 50
Single Branch Agents - Acquisition Q3
Acquisition Agent Value £m
1 Wilkinson Williams 371
2 Lunson Mitchenall 319
3 Harper Dennis Hobbs 300
4 Dowley Turner Real Estate 265
5 Michael Elliott 254
6 Tudor Toone 223
7 Harvey Spack Field 155
8 Inglis Howie 138
9 Hanover Green 131
10 Morgan Williams 129
11 Edgerley Simpson Howe 122
12 James Andrew International 89
13 Goldenberg Real Estate 83
14 Farmer Capital 72
15 Finn & Co 71
Investment Agents League Table Methodology
All agents active in the UK investment market are invited to participate in CoStar’s league rankings.
Participants submit a schedule of investment transactions subject to any confidentiality restrictions.
All deals submitted for inclusion are independently verified by our Research Team.
Contact investmentdeals@costar.co.uk
All of the top Investment Agents* in these league tables are
Propex members.
Find out more: www.costar.co.uk/products/propex
* Based on Top 5 Investment Agents– Vendor & Acquisition
20. CoStar Group
Don’t waste the moment.
Get the advantage of integrated
Data, Analytics and News.
With the market well on track to break new records, are you
lagging or leading the race to outrun your competition?
Over 600 UK firms have already signed up to CoStar Suite.
20
Find out why at www.costar.co.uk
or call 020 3205 4500
21. Investment Review Q3 2014
Data, Analytics and News Have Come Together
21
Access a unique combination of Data, Analytics
and News, offering the most comprehensive macro-to-
micro explanation of the latest trends in the UK
property market.
CoStar’s proprietary data, which underpins this
report, is sourced directly from UK property agents,
investors and other involved parties to accurately
reflect the transactional market in real time.
Typically 600+ investment deals are recorded each
quarter, more than any other data source. The
Analytics team then overlays top-down analysis
of the UK market on this unique dataset, breaking
down investment trends by sector, sub-sector,
geography, lot size, investor type, and yield. Finally
the News team adds perspective to the analysis by
providing timely industry and market updates.
For more information on our methodology or the data in this
report please contact one of the authors below
Iain Smyth
Senior Research Associate
T: 014 1354 0629
E: ismyth@costar.co.uk
Ola Dawodu
Research Associate
T: 014 1354 0683
E: odawodu@costar.co.uk
Francesca Cooke
Real Estate Economist
T: 020 3205 4624
E: fcooke@costargroup.com
Mark Stansfield
Senior Research Analyst
T: 020 3205 4589
E: mstansfield@costar.co.uk
Paul Norman
Editor, CoStar News
T: 020 3205 4510
E: pnorman@costar.co.uk
22. $ E AT S H O P GYM
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OC. Connected insights.
osborneclarke.com
22
23. Investment Review Q3 2014
Get in Touch with CoStar
CoStar Group (Nasdaq: CSGP) is the leading provider of commercial
real estate information, analytic and marketing services. Founded in
1987, CoStar conducts expansive on-going research to produce and
maintain the largest and most comprehensive database of commercial
real estate information.
Our suite of online services enables clients to analyse, interpret and gain
unmatched insight on commercial property values, market conditions
and current availabilities.
CoStar maintains offices throughout the U.S. and in Europe with a
staff of approximately 2,000 worldwide, including the industry’s largest
professional research organisation.
sales@costar.co.uk www.costar.co.uk
23
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