Transaction volumes decline during lockdown.
The security of (future) income, the basis of investment value, has found itself on sudden shaky ground this year. Economic, leasing and investment activity nosedived in Q2 2020 after a national lockdown was imposed on 23 March to decrease the spread of COVID-19. Uncertainty and hurdles to doing business led to UK office investment falling by 78% during Q2 2020.
Only prime West End offices record stable yields
Cluttons prime equivalent yield estimates for Q2 2020 are shown in Table 2 within the PDF below. Only prime West End offices recorded stable yields in Q2, with yield decompression elsewhere of up to 25bps. The West End is a prime market with a mixed occupier base that is less exposed to occupier failures, missed rental payments and businesses shedding large floors (unlike the City and Docklands), it therefore remains relatively attractive. In a crisis there is a flight to core. Long let assets with strong covenants in the best locations will be least affected by a negative market sentiment.
Overseas investors remain the dominant investor group
Overseas investors have become a dominant force in the office investment market, growing from 34% in 2006 to a peak of just over 65% of total investment in 2016. In Q2 2020 they still made up 57% of office investment, followed by UK institutions with a 25% share of transactions. If at some point the influx of overseas money were to be reversed it would have a marked impact on the office investment market. A reversal could happen if, for example, the bond and stock markets or other geographical property markets became more attractive and offered better relative growth. But this is unlikely in the short-to-medium term.
The investment market can offer exciting opportunities to those with ‘dry powder’
Investment yields tend to move ahead of rental growth, as investors anticipate such growth and do not want to miss out on a buying opportunity amid great competition. After the Global Financial Crisis, investment market sentiment turned in the space of a week when it became clear that some forecasts were no longer being adjusted on the downside. Those investors in the fortunate position of having ‘dry powder’ to invest largely wait to see how the crisis and its impact on the investment market unfolds. On a long-term strategic basis most investors still see property as a relatively attractive asset.