2019 H1 Capital Markets Review

Intro

The highlights of 2019 have been all about great sport, Liverpool v City in the Premiership, an all-England Champions League final, that amazing summer Sunday when England won the Cricket World Cup, and Djokovic beat The Fed in an epic Wimbledon final.  Sitting alongside all the sports were a few tears from our outgoing PM, who’ll probably be remembered more for her dancing and love of wheat fields than her achievements in office.

Yet, despite parliamentary issues, and the ongoing Brexit uncertainty, the UK economy ploughed on, with the UK’s Information and Communications sector in particular remaining strong.  Growing at five times the wider economy, the resilience of our tech industries highlights the UK’s role within a global context. From electric vehicles, to AI, to life sciences and fin-tech, the UK is a leading force, aided by UK academia, a great and transparent business environment, a world leading legal framework, plenty of available capital, and most importantly to us, the real estate and infrastructure to support modern business.

H1 Summary

• Q1 2019 looked strong on the surface; total Central London investment turnover was a shade over £5bn through the quarter.
• This was aided by the delayed completion of Battersea Power Station’s (BPS) commercial assets by a Malaysian JV, totalling £1.58bn, which was mostly an internal buyout; they already held 70% through the developer.
• And Citi’s acquisition of the 1.2m sqft HQ at 25 Canada Square for £1.12bn; aligning with the firm’s aim to own and not lease offices globally.
• Yet, even excluding 70% of the BPS deal and Citi’s HQ acquisition, Central London investment turnover showed positive signals through Q1.
• However, overall, H1 was marred by Q2’s statistics, with total Central London investment volumes falling short of £2bn; the lowest quarter turnover since 2016.
• Looking at the first two quarters of 2019 in more depth, some interesting points can be highlighted:
  • Transactions have been slower to complete, with many Q2 deals rolling into Q3 completions.
  • There has been a significantly lower level of available investment stock.
  • The market has seen much lower numbers of large investment transactions of £100m to £1bn+ deals that we were so used to seeing through H1 2018.
  • These larger deals, which have recently been dominated by Asian capital have been missing; partly through lacking available stock, and partly because of their own domestic barriers.
  • The Korean funds have been unable to syndicate UK purchases domestically, while Chinese capital has had one of its periodic brakes on outflow from the mainland.
• Contrary to this inactivity, in the sub £100m market, sales have seen intense bidding, and investments have been acquired with lower risk premiums applied to value-add and opportunistic assets
• For the first time since 2011, UK investors made up 40%+ (c.£1.5bn) of Central London’s turnover, with UK investors completing 20% more deals by number than overseas investors through H1.
• Domestic investment in Central London has highlighted current market trends, with sub £50m lots being the main attraction for UK buyers, composed of an even balance of UK fund and private buyer activity.

Predictions for the next 12 months

• Not the easiest point at which to be making predictions with deal/no deal and general election/no general election all in the variables column.
• What we are certain of is that market fundamentals remain good for Central London. Alongside the established qualities of market transparency, lease length, quality stock and a highly skilled workforce, the currency advantage overseas investors have enjoyed since 2016 has strengthened markedly and the anticipated tightening of supply over the next 24 months, make the City especially attractive to investors.
• With that in mind, the market would seem to be getting some retaliation in first with a few new deals going through in the early part of Q3 evident, alongside the completion of a number of larger deals as a hangover from Q2.
• The availability of investment stock will be an ongoing issue, at least until the Brexit deadline date of October 31st and this will mean assets that are in the market will continue to find buyers.
• Admittedly a statement of the obvious, but what happens after October 31st will depend on whether the UK comes out of the EU with or without a deal and, as seems more likely, if there is a general election.
• Deal or no deal, a general election is sure to delay things further as the possibility of a Corbyn led Labour government, either on its own, or in coalition, will fill the market with dread.
• The only safe prediction to make in these circumstances is another market hiatus during general election campaigning, and, in all probability, an increase in deal volume subsequently, pricing dependent on the outcome of the election.
• Then again, we could still be saying all of the above for years to come…