Capital into UK property: Deal volume back to 2007 levels as central London booms

The quarterly property investment volume for Q3 2013 was £14.77bn – the highest since Q2 2007.

The year-to-date total is already higher than the whole of 2012, at £35.07bn, compared with £34.65bn last year. It is 32% higher than the £26.65bn for 2012’s first nine months.

In Q3, £8.05bn was spent in central London, the second highest recorded, though it was boosted by GIC’s £1.7bn acquisition of 50% of Broadgate.

p31There has been a marked pick-up in deal volumes this year, with every quarter so far higher than the corresponding one in 2012. The £14.77bn Q3 total was the highest since Q2 2007 (see top graph), partly reflecting some very large individual deals (see table).

Overseas investors still dominate the market. They bought 44%, or just under £6.5bn, of the Q3 property traded. UK institutions, meanwhile, acquired £3.2bn of assets. Far Eastern buyers accounted for 42% of overseas buyers’ spending, followed by US investors (23%) and German investors (17%). Far Eastern investors have also been the largest investors during the year to date, at 31% (see second graph).

The biggest net disinvestors in Q3 were the US and Irish; net disinvestment by the latter since Q1 2009 has been £10.78bn.

Central London had a record quarter, with £8.05bn invested, the highest volume since £8.1bn in Q4 2006. David Adams of data compiler Property Archive says: “Even then, that was unusually high; since 2000, the average spent in central London has been
£3.38bn per quarter.”

Although most of the very large assets traded were in London, there were some big alternative asset deals too (see table).

The volume of transactions is having a dramatic effect on initial yields, which fell from 7.79% in Q2 to 6.96% in Q3. The greatest compression was in the office sector, of 128 basis points, to 6.97%, followed by industrial, down 62bps to 8%.

Karen Sieracki of Kaspar Associates says: ‘The proposed tailing off of quantitative easing has already increased UK government gilt yields, with no impact so far on property yields in the light of the UK economic upswing.

“The market assumes that the momentum of the UK economy, with the resultant increase in rental growth, will bridge the time gap of any outward potential pressure on property yields as quantitative easing winds down.

“Most property investors appear to be happy to ride the wave.”