2017 saw investment volumes in the UK commercial property market rise by over 10% on the previous year. Much of this was helped by overseas buyers and a weak Sterling, which remained 10% on average below pre-referendum lev- els. Whilst an improvement on a subdued 2016, the year of the EU referendum, transaction activity was notably still nearly 30% down versus its 2015 peak, reflecting Brexit-related macro uncertainty. Underneath the 2017 headline figures, non-currency driven activity was also relatively quiet.
As well as impacting investment volumes, macro uncertainty has been a key driver of pricing in the UK real estate market. Investor preference for ‘safer’ assets has created a clear divergence in pricing between ‘core’ (prime) property and non-core (secondary) assets with perceived risk attached. Since the referendum, core asset capital values have climbed 5%, while non-core asset prices have fallen 8%, creating an interesting pricing dislocation. In addition, the definition of what is considered a core asset has narrowed over the last 18 months as investors have become more cautious, preferring the highest quality assets with the securest income profiles. As a result, the net initial yield spread between core and non-core assets has increased by 70 basis points (bps) since March 2016 to stand at 320bps in February 2018. We believe this dislocation of pricing presents experienced investors, who are willing to take on risk in a considered manner, with an exciting “value-add” investment opportunity in locations with favourable supply and demand dynamics.
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