Overseas buyers stepped up UK investment throughout 2009, while UK institutions returned to net property investment in Q4.
- UK investment jumped again in the last quarter of 2009, to £7.8bn, taking the total deals for the year to £22.3bn.
- A total of £13.6bn was transacted in the second half of the year, compared with £8.7bn in the first half – a 56% increase.
The highest volume of investment deals for 2009 was recorded in Q4, at £7.8bn, compared with almost £5bn in Q1, £3.7bn in Q2 and £5.8bn in Q3. Total investment for 2009 was £22.3bn, the lowest for 10 years – but only about 10%, or £2.4bn, down from the £24.7bn total at the end of 2008.
In Q4, UK institutions finally became net investors in UK property for the first time since Q1 2007, with a £486m net investment. Their share of total investment grew to 29% in 2009, from 21% in 2007. Overseas buyers continued to increase their share of deals, from 29% in 2007 to 32% by 2009.
On the disinvestment side, UK institutions continued to be the largest sellers, at 41% by value in 2009, edging down from 43% in 2008. UK listed property companies increased their share of sales to 23% in 2009, from just under 10% in 2007, but their sales fell from £3.1bn in the first half to £2.1bn in the second half. Owner occupiers sold 13% of investments (£2.9bn). By Q2, Irish investors became the largest net overseas disinvestors for the rest of the year, with £365m of sales.
Offices were the favourite sector for investment, accounting for 28% of all deals, followed by mixed retail and offices, at 16%. Central London remained the favourite location, at 32%, followed by the South East, at 12%. London and the South East accounted for just over 50% of all deals, followed by UK-wide (portfolio) deals (almost 22%).
UK institutions took a bigger slice of investment volumes as 2009 progressed, with a 34% share in the second half (£4.59bn). This was just higher than overseas investors, at 33% for the same period (£4.49bn). UK unlisted property companies’ share of activity slipped from 18% in the first half of 2009 to 14% during the second half.
UK institutions remained the main source for UK property on the market, selling 41% (or just over £9bn) of the total – slightly less than 2008, when they had a 43% share(£10.5bn) of all sales. UK listed property companies had a 13% slice of sales, at £5.2bn, while owner occupiers’ share fell from 17% in 2007 (£8.5bn) to 13% in 2009 (£2.9bn).
In terms of net investment/disinvestment flows, UK institutions emerged in positive territory by the end of 2009, joining overseas investors, who were boosted by just over £1bn net investment from the Far East. UK private investors continued to be net investors from Q3 2008, totalling £1.4bn for 2009, slightly down from £1.6bn at the end of 2008. As liquidity improved with more buyers, yields compressed, starting in Q3, when retail warehouse, shopping centre and office yields fell 40-60bps. By the end of Q4, all yields had fallen by nearly 100bps, with industrial yields down 166bps (see table). As the number of deals increased, so did the average lot size, to £26.5m, from a low of £16.0m at the end of Q2 2009.
Overseas buyers favoured offices and retail, while UK investors – especially property companies and institutions – mainly preferred portfolios, shopping centres and offices. UK institutions and private investors led on office buying in the second half. The biggest change in Q2 was a rise in investment in offices and retail warehouses and a fall in portfolio investments – £2bn was spent on portfolios in the first half, nothing in Q3 and £1.2bn in Q4.
Overwhelmingly, the money was spent in mainstream sectors: offices (28.2%), retail (25.27%), retail/office mixed (15.86%), industrial (11.11%) and portfolios (13.6%). The Property Archive recorded no deals in some alternative property sectors, such as nursing homes, and only £205,000 (under 1%) was spent on leisure property.
Sales by overseas investor often indicate problems at home, and this was true of Irish and Russian investors. The Irish increased their net disinvestment each quarter from Q2.
Scandinavians and South Africans were also net disinvestors of UK property in 2009, as were US investors (only just) by Q4. The figures are fairly low (ie Scandinavians -£32m, Russians -£24m, Americans -£22m and South Africans -£6m), but this could indicate that domestic troubles affected investors in different ways. For example, Middle East and Israeli investors continued to be positive net investors in UK property, despite domestic tensions, as it is still seen as a good diversifier.
As values rose in Q4 2009, greater turnover is likely from investors who bought in 2008 and early 2009. UK institutions are moving up the risk curve as less prime stock comes to the market and their cash allocations rise. How long this scenario lasts will depend on the UK economy, tenant demand, interest rates staying low and quantitative easing. Some say 2010 will be another year of two halves, with positive returns in the first half and negative ones in the second half. UK property was first to experience an upswing, but other countries are following. The appeal of UK and London property has diminished as capital values have risen. Investors are asking how long this will last and to what extent. There may be greener fields outside the UK in 2010 for investors who sell UK property to realise profits.