By Tom Leahy on June 6th, 2019
The U.K. continues to be wracked with political uncertainty, which is negatively affecting commercial property deal flow and valuation indices. However, Real Capital Analytics analysis of transaction prices shows the right assets are still changing hands at elevated price levels.
U.K. commercial real estate transaction prices overall rose by 11.2% in Q1 2019 in comparison with a year earlier. This made the U.K. the best performer of all the country-level indices published by RCA.
The positive outturn might seem counterintuitive at a time of political flux and reduced transaction flow. However, the robust price trend illustrates that during times when there are few, if any, forced sellers in the market, it is the best quality properties that are finding a buyer.
Broadly, the academic research tells us that owners tend to sell winners and hold losers, and the current combination of political uncertainty, low volumes and rising prices supports tends to support that hypothesis. Owners also need an incentive to sell, given the cost of trading in and out of the market and the reported shortage of suitable assets for purchase. This also provides some of the impetus for prices to increase.
Price trends in the U.K. are by no means uniform. Prices for offices in the Big 6 (Birmingham, Bristol, Edinburgh, Glasgow, Leeds, Manchester) are coming off a low base and still 15% below their pre-financial crisis peak. Central London offices, meanwhile, are 55% above.
As such, while the short-term rate of growth outside London might look impressive now, over the medium- to long-term these areas have been some of the poorest performers in a global context. In fact, from 2007 to 2019, Big 6 retail was the weakest of all 350+ price indices produced by RCA.
Price growth in the industrial sector — predominantly located outside of London — has been a major winner in the last 36 months. Prices have grown at an average of 11% per annum in the last three years, compared with 7% for the wider U.K. commercial market. Much of this gain has been driven by the weight of capital piling into the sector, pushing yields down to record lows.
The overall rate of industrial price growth looks to be slowing but it is unlikely the price appreciation story for this segment is over. However, the prospects for the rest of the regional market are less certain and with a growing number of reports regarding financial distress in the retail sector, there is scant likelihood of price acceleration there.
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