Investment Quarterly Q1 2023

Overview

Investment in UK commercial property fell for the fourth consecutive quarter in Q1 2023 as spending in the industrial and alternative sectors reduced sharply. However, investment activity in the retail sector was resilient compared with recent quarters. 
 

Source: Carter Jonas, RCA, CoStar

£7.7bn was traded in Q1 2023. This was down 26% quarter-on-quarter, 43% below the five-year quarterly average and was the weakest quarter for investment for more than a decade. The rolling annual total also fell notably compared to the previous six quarters and was 23% below the five-year average at £56.4bn.      

Source: Carter Jonas, RCA, CoStar 
 
Just under 60% of all investment (excluding multi-regional portfolio deals) took place in the regions (UK excluding London) in Q1 2023, broadly in line with the five-year average of 40%. The South East was the region which recorded the highest level of investment outside the capital with circa £630m purchased in Q1 2023, followed by the East of England with just under £240m. 

Conversely, investment in London accounted for 40.1% of the total, which was notably above the £1.8bn recorded in Q4 2022 and broadly in line with the five-year average of 39%. The “flight to quality” accelerated by the pandemic continued to be a theme in the capital, especially in the office sector, where more than 85% of the deals were for high quality offices. Overseas capital drove volumes in London, accounting for nearly 70% of the total, while in the regions, the share of overseas investment was 25%, a decrease from 33% share in the previous quarter. 
 

Source: Carter Jonas, RCA, CoStar

The office and the retail sectors accounted for the largest share of the quarterly UK total, with 36.4% and 29.8% respectively. Notably, the retail sector was the only one recording volumes above the five-year quarterly average. In contrast, investment in industrials amounted to 16% of the total, the lowest share since Q2 2020.

 

Office

Office investment volumes fell by 51% quarter-on-quarter to £2.6bn in Q1 2023 and 45% down on the five-year quarterly average as spending on regional offices cooled. No deals above £500m were recorded in Q1 2023 but several deals above £250 million were recorded, all in the capital. The acquisition of St Katharine Docks for ££378m by the Singapore-based investor CDL was the largest deal in the first quarter. The acquisition of One New Street Square by the Hong Kong investor Chinachem Group for £350m was another notable deal in Q1.

Industrial 

Industrial investment was down by 52% quarter-on-quarter in Q1 2023, to about £1bn. The sector has seen the biggest fall in investment in recent quarters amid falling values. Several portfolio deals were completed, such as the acquisition of a logistics portfolio worth £125m by a joint venture between Copley Point Capital and Brookfield Asset Management. The latter was also responsible for the largest single-asset deal of the quarter as a buyer, a Wilko Distribution Centre in Worksop for £88m. 

Retail

Retail investment volumes picked up in Q1 despite the headwinds facing the sector, including the cost-of-living crisis and Inflationary pressures. Retail investment was up  138% quarter-on-quarter, totalling just above £2.1bn, the strongest quarter for investment since Q1 2022. Volumes were supported by several retail park, shopping centre and supermarket deals. Supermarket REIT increased its share from 26% to 51% in a Sainsburys supermarket portfolio in January in a deal worth £196m. The REIT then sold the majority of its share to Sainsburys two months later. Elsewhere, fashion house Chanel sold 27 Old Bond Street for £140m, while DTZ purchased Purley Cross Retail Park for £59m. 

Alternatives

Spending on the alternative sectors slowed sharply in Q1 2023. With £1.2bn spent, volumes were down 76% quarter-on-quarter and 269% down year-on-year. However, several hotel and car parks deals were completed in the first quarter. For example, the US-headquartered GreenPoint Partners bought Davidson Kempner’s NCP car park portfolio for £305m, while Fattal Hotels acquired The Grand Hotel Brighton for £60m and Pandox purchased QHotel The Queens in Leeds for £53m.  

Overseas Investment

Source: Carter Jonas, RCA, CoStar

• Overseas investment in UK commercial property totalled just £2.3bn in Q1 2023, down 75% quarter-on-quarter and 81% down year-on-year and the lowest quarter for overseas investment since Q1 2012. Spending in London notably outweighed that in the regions.
  
  
• Spending by Far Eastern investors dropped in Q1 2023 compared to the previous quarter. Despite the weaker spending of around £1bn, Far Eastern investors had the highest share of the total. Several large deals completed in the first quarter, including the acquisition of St Katharine Docks for ££378m by the Singapore-based investor CDL and the purchase of One New Street Square by the Hong Kong investor Chinachem Group for £350m.
  
  
• US investment cooled in Q1 2023 following a strong last quarter of 2022. The amount spent by US investors in the first quarter totalled £750m, the weakest total since Q1 2010. Despite the weaker spending, US investors had the second-highest share of the total overseas investment. 
  
  
• German investors were also active after several quiet quarters and accounted for one of the largest deals in Q1 2023. Munich RE purchased 50% of 120 Fenchurch Street, for £312m, reflecting a net initial yield of 4.4%.

   

The outlook from Ali Rana, Head of National Investment

• With the International Monetary Fund has recently added its voice to the view that they expect a low-interest rate environment to return together with a fall in inflation, it is hoped that this will result in investors having a more positive outlook as the year continues.

• Despite the UK’s improving economic prospects, we expect transactional volumes for 2023 as a whole to be low, albeit with an increased level of transactional activity expected during the second half of the year. 

• There are currently more buyers than sellers particularly for prime stock. The current high cost of finance and inflation continues to play on the minds of many buyers and sellers, resulting in decisions being deferred or delayed until market conditions stabilise.

• However, there are opportunities for those buyers who have capital ready to be deployed and are seeking to take advantage of falling values and the lack of competition.

• There is a risk for investors who need to refinance this year, against a backdrop of higher debt costs, falling values and increased ESG requirements, particularly for older office buildings.

• We expect pricing to stabilise, particularly for prime assets in strong locations with strong ESG credentials, and this is where investor demand is focussed in the upcoming months. 

• Much of the investor interest is expected to come from varied sources. Domestic investors with significant levels of capital ready and waiting to be deployed are likely to be active in the upcoming quarters. Strong interest as in previous quarters is also expected to be seen from overseas investors, particularly private equity based in the US together with investors from Asia.