Deal or no deal – how is the UK commercial real estate market holding up?

The start of a new decade, 2020 also marks the end of an era with the UK’s departure from the European Union. Looking back at how the real estate investment market performed in 2019, our transaction advisory team tell us why they remain optimistic for the year ahead.

In 2019, UK commercial real estate investment was more subdued than in recent years and, despite a flurry of deals in Q4, the year-end value of £48.4 billion (as reported by Savills) represented a 23% fall on 2018. However, a closer look shows many sectors remained active with the most notable slow-down happening in Retail.

Retail

Likely attributable to the documented decline in traditional high street shopping and Brexit uncertainty, the retail sector displayed subdued numbers. This is likely to continue into 2020 given the failure of stores including Debenhams, Mothercare, Select and more recently Beales. However, whilst the retail warehouse market is weakening, signs of expansion have been seen in the value retailers.

Offices

The office investment market remained active with one of the largest deals of the year being the purchase of Canada Square by Citigroup for £1.1 billion. After a slow H1, December saw the highest monthly transaction figure at £3.3 billion, which was mostly concentrated in London. The office sector is one of the most international in the UK’s real estate market - with offices in central London attracting around 75% of overseas investment; this appears to have held up despite Brexit uncertainty.

Industrial

Industrial investment also saw a surge in December 2019 with two large portfolios completed and a total of £1.4 billion transacted. Predictions for 2020 include a likely increase in popularity for strategically located logistics assets in Germany, Netherlands, Poland and the Czech Republic due to rise in e-commerce in these countries.

Alternative/others

The alternate / mixed-use sector is also looking favourable and has been identified as having the largest share of investment in the third quarter of 2019 at £1.5 billion; with widespread interests including student housing, healthcare and hotels. The Urban Land Institute and PwC Emerging trends in European Real Estate report also identified that - outside of logistics and residential - the alternative commercial sectors (including self-storage, data centres, serviced offices and science parks) look the most favourable for 2020.

Overseas investment

Overseas investors are reported to have increased their market share in UK real estate from 44% in 2018 to a 49% share in 2019. Partly due to an increase in North American investors, and despite a decrease in investors from the Far East, this indicates that the UK is still seen as a stable area to invest. Hong Kong and South Korea investors are tipped to return to London in 2020.

“Our experience of 2019 closely reflects these findings. On an almost weekly basis we have supported clients on deals involving office assets, in particular in London and the Southeast. We particularly saw strong levels of activity in the care home and logistics sectors, including advising on a new large regional distribution hub for a value retailer in December. Q4 was an especially busy period for our team, including five significant real estate portfolios in the UK and mainland Europe where we advised UK institutional investors and global investors for acquisition, refinancing and divestment purposes"

Jo Osmond

Senior Consultant

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With the UK now in the Brexit transition period  and the Oxford Economics predicting a 30% probability of a global recession in 2020, we are left to question whether the 2019 trends of economic slowdown will continue, or whether the stability of a majority UK government and the progression of the Brexit process provide greater certainty, strength and activity to the market?

 

 

 

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