Strong investment continues in UK commercial property, latest industry report shows

Investment in UK commercial property increased by 66% or £4.2 billion in January compared to the same month last year as investors look beyond Brexit, according to the latest industry report.

Overall investor appetite for UK property remains very strong with total investment into real estate amounting to £65.4 billion in 2017, a 26% increase on 2016’s annual total, preliminary data from Savills shows.

The firm’s February Market in Minutes report reveals that the office and industrial sectors led the way, with overseas investors responsible for nearly half of total volumes, of which Asian investors were the most active, accounting for a fifth of all investment.

Savills says that average UK prime yields remained static in January at 4.52%, around 30 basis points lower than the same point in 2017, with a small amount of downward pressure on yields for M25 office and industrial distribution assets.

Investors ploughed nearly £11 billion into the industrial sector in total during 2017, up 80% on 2016 and the report says that they continue to be attracted to the sector by the secure income it offers, with pressures on land, particularly inside major cities from other uses, likely to maintain undersupply and deliver rental growth.

‘January’s volumes demonstrate that investors are still looking beyond Brexit and are happy to commit to the UK to secure prime property with secure income characteristics,’ said Mark Ridley, chief executive officer of Savills UK and Euro.

‘Based upon current projections, driven by a downward shift in equivalent yields, we expect total returns for average UK commercial property to be around 7% this year before weakening slightly for some of 2019 as investors take a wait and see approach as the UK officially leaves the European Union,’ he added.

According to Steve Lang, director in Savills commercial research team, a decade ago average UK prime yields rose by over 120 basis points during the year, development activity indicators had slumped and GDP expectations were slashed.

‘Compared to this, the impact of the Brexit vote is relatively mild. In addition, you would have been hard pushed in 2008 to have predicted the explosive growth in online shopping over the past decade which has largely driven occupier demand, and therefore investor appetite, for industrial space,’ he explained.

The UK accounts for a significant proportion of the European corporate investment transactions including venture capital, private equity and mergers and acquisitions, says the Savills report.

Volumes have increased substantially to £6.4 trillion in total over the last five years, with the UK accounting for around 30%, on average, of all European deals by value. This demonstrates confidence in the UK as a centre for investment, whether it is corporate M&A or investment into the start-up community, according to Savills, and is likely to trigger future real estate activity as companies grow and expand and then recruit as a result of raising new capital.