INVESTMENT BRIEF the Definitive Guide to UK Commercial Property Investment

INVESTMENT BRIEF The definitive guide to UK commercial property investment

Winter 2020

geraldeve.com CONTENTS

Executive Summary 3

Economic Overview 5

Industrial 8

Offices 10

Retail 12

Hotels 15

Leisure 16

Corporate Finance 18

Gerald Eve in the Market 20

Further Insight 22

Contacts 23

2 INVESTMENT BRIEF EXECUTIVE SUMMARY

Quarterly UK property investment by segment Sources: Property Data, Gerald Eve

£ billion 20

Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020

Office Industrial Retail Leisure Alterntives

The pace of the initial economic recovery in early summer This mixed picture was also reflected in yield movement in Q3. was strong after the initial lockdown measures were relaxed Retail yields moved out further and capital values continued to and GDP rose by 15.5% in Q3. But this figure masks a loss of tumble, notably for shopping centres. Office yields edged up momentum from August, and in September output was still but were broadly flat overall in Q3, after a shift out in Q2. But more than 8% below its pre-pandemic level. Business survey competition over industrial assets meant that yields actually data pointed to a further loss of momentum in October as local sharpened in Q3, and higher frequency data show that capital Covid-related restrictions became more stringent. growth intensified into the first month of Q4.

The second lockdown in England in November (with similar We expect All Property rents to fall 2.9% in 2020, and a further restrictions in other parts of the UK) and ongoing stricter tiering 0.7% in 2021 – driven by the tail end of the retail repricing and from December means that UK GDP is set to fall by nearly 3% in offset by more positive growth in industrial. Following similar Q4 and the 2020 GDP forecast has been revised down to -11.3% sector dynamics there will be a 30bp outward yield shift in 2020 (from -10.3%), before a recovery of +5.2% in 2021 (from +6.7%). but we expect more investment stabilisation in 2021 industrial finishes its miniboom and retail losses are fully priced in. UK commercial property investment staged a small recovery This would generate total returns of -4.5% in 2020 (the first in Q3 to £8.1bn, up from £4.3bn in Q2. The figures for the first negative annual return since 2008) and +6.0% in 2021. three quarters of 2020 have been significantly bolstered by the Alternatives sector (notably Blackstone’s £4.4bn acquisition of the IQ Student Portfolio in Q1), without which just over £20bn was transacted – the most subdued since the financial crisis. There are disparities across property sectors, with retail and leisure investment volumes at record lows while the much more buoyant industrial segment notched up nearly £2bn in Q3 with a return of portfolio deals.

EXECUTIVE SUMMARY 3 The investment market for industrial is currently active and liquid. Unlike other real estate segments, confidence in the All property total return and components underlying occupier market is high. Voids continue to be low Sources: MSCI, Gerald Eve and further rental growth is anticipated, especially in the South East. The investor buyer pool for multi-let widened in %, per year Q3 and portfolio deals made a significant return. With rents at 30 all-time highs, capital values are back to their peak or beyond. Weakness in H1 will have caused a dip in the 2020 annual total 20 return to +4.2% (the lowest since 2012), but industrial will easily FORECAST outperform the other property segments. H2 positive rental 10 growth and yield compression – particularly in London & the 0 South East – is likely to be sustained into 2021 and drive an improved 7.9% annual total return. -10

-20

-30 2017 2013 2012 2019 2015 2016 2018 2014 2010 2011 2021 2022 2007 2020 2009 2005 2006 Following record low activity in Q2, office investment increased 2008 by 54% to £2.3bn in Q3. Many of these were transactions that Income return Yield impact were under offer pre-covid. The buyer pool has shrunk, and – Rental growth Total return unlike Industrial – the extra due diligence process has increased the typical transaction time. This will help some investors be more selective in acquisitions, while others will put the onus on guaranteed income over building quality. High quality London offices with strong covenants are garnering the highest level of Whilst the retail sector is undergoing a structural interest, notably from overseas buyers. Meanwhile demand for re-pricing accelerated by Covid there are others, value-add stock across the UK has become increasingly careful and tentative. Our outlook for offices has improved, following such as consumer-focused logistics and real estate lower than anticipated falls in rental growth this year. However, supporting the digital world, that have actually forecast annual total return will be negative, at -4.8% for 2020. benefitted from the pandemic. The market dislocation that we are witnessing will bring with it investment opportunities, and in a world of subdued returns those assets that best capitalise on these broad megatrends have the greatest alpha potential. Retail investment increased in Q3, but remains severely depressed, especially for shopping centres. The small tick John Rodgers up was driven by increased investment activity in the Partner less distressed sub-segments – namely retail warehouses, Tel. +44 (0)203 486 3467 supermarkets and some portfolio deals. Retail rental growth fell [email protected] into deeper negative territory in Q3, while anecdotal evidence suggests that late and non-payment of rents continues. The outlook is poor, with store closures at the start of the critical Christmas trading period, the worsening economic backdrop and as shoppers shift increasingly online. Total return is forecast to be -17.8% in 2020 but will compare favourably with the other property segments again by 2022 with investment market stabilisation and a relatively high income return.

4 INVESTMENT BRIEF ECONOMIC OVERVIEW

The impact of the second lockdown in England in November (with similar restrictions in other £ parts of the UK) will be less severe than the first. Nevertheless, Oxford Economics expects GDP to fall by nearly 3% in Q4 and the 2020 GDP forecast has been revised down to -11.3% (from -10.3%), before a recovery of +5.2% in 2021 (from +6.7%).

The pace of the initial recovery in early summer was strong after the initial lockdown measures were relaxed and GDP rose by 15.5% in Q3. But this figure masks a loss of momentum from August, despite support from the ‘Eat Out to Help Out’ scheme and the reopening of schools. In September, output was still more than 8% below its pre-pandemic level, with much of the services sector reporting significantly larger gaps.

Business survey data pointed to a further loss of momentum in October as local Covid-related restrictions became more stringent. Manufacturing sentiment and output is likely to plunge in November. But given that the sector has not been forced to close, the drop in output is likely to be smaller than the fall in wider GDP and the overall fall in 2020 is set to be lower than for consumer spending.

The Job Retention Scheme (furlough) has been extended to the end of March 2021, which will ease upward pressure on unemployment. However, participating in the scheme will cost employers more than it did in the first wave through national insurance and pension contributions. Ultimately, when this fiscal support is withdrawn, unemployment is forecast to peak at around 7% in Q2 2021 on the ILO measure.

Recent news of effective potential vaccines should provide a significant boost in the fight against coronavirus, but the complexities of implementing a comprehensive inoculation programme suggests that any economic benefits are unlikely before H2 2021.

The other key factors influencing the UK outlook are: sustained monetary policy support through further quantitative easing over 2021 and mooted negative interest rates that will keep bond yields below 1% through to 2023; very low inflation, which reflects the temporary VAT cut for the hospitality sector and generally weak domestic economic activity – this will provide a boost to household spending power; and extra trade frictions due to Brexit from customs bureaucracy and some regulatory barriers that will weigh on export competitiveness.

ECONOMIC OVERVIEW 5 Monthly UK GDP Key macroeconomic variables: history and forecast Sources: Oxford Economics, Haver Analytics Source: Oxford Economics

February 2020 = 100 2015 2016 2017 2018 2019 2020 2021 2022 105 GDP growth 2.4% 1.7% 1.7% 1.3% 1.3% -11.3% 5.2% 6.4% 100

Consumer spending 3.0% 3.7% 1.0% 1.3% 0.8% -14.8% 5.2% 8.3% 95 growth

Manufacturing 90 -0.5% 0.3% 2.3% 1.1% -1.7% -12.0% 2.7% 2.8% output growth FORECAST 85 Services 1.8% 1.7% 0.6% 0.7% 2.1% -1.2% -2.7% 3.4% employment growth 80 10-year bond yield 2.0% 1.3% 1.3% 1.3% 0.9% 0.4% 0.3% 0.7%

75 RPI inflation 1.0% 1.7% 3.6% 3.3% 2.6% 1.5% 1.7% 2.5% 70 Jan’20 Apr’20 Jul’20 Oct’20 Jan’21 Apr’21 Jul’21 Oct’21

6 INVESTMENT BRIEF

INDUSTRIAL

for over £400m. There were also some significant multi-let deals • After a dip in Q2, the investor pool widened in in the regions in Q3, which includes L&G’s £60m purchase of Q3 and the market is active, liquid and efficient - Hillthorn Park in the North East. confidence in the underlying occupier market is high. Portfolio deals made a significant return in Q3, with a five-fold • There has been an increase in institutional increase on Q2 to over half a billion invested. The largest was the investment activity in particular and portfolio £151m BAPF portfolio sold to Exeter Property Group. This trend is deals made a significant return in Q3. set to continue into Q4 with the late-October £473m Blackstone purchase of the Platform portfolio. • With rents at all-time highs, capital values are back to their peak or beyond. Weakness in H1 Vendors include the institutions, especially in multi-let where some are trimming their exposure to this segment. Funds that will moderate the 2020 industrial total return have been wound down or simply profit-taking have also been but this will far exceed office and retail. successful in marketing and selling industrial.

After a lengthier transactions period over the summer, deals were The investment market for industrial is currently active and liquid. generally able to get across the line more efficiently in Q3. Both Unlike other real estate segments, confidence in the underlying buyers and sellers are highly motivated to complete, given the occupier market is high. Voids continue to be low and further unpredictable and changing nature of the pandemic backdrop. rental growth is anticipated, especially in the South East. Returns volatility has been driven by yield movement. Quarterly Investment volumes took a dip for the first coronavirus lockdown negative yield impact was at its 2020 maximum in May but has in Q2, notably for multi-let. In the flight to “long and strong” income since rebounded and contributed positively in September and provided by distribution warehouses, there was caution surrounding October as industrial yields sharpened again. UK-wide distribution the occupier base in these smaller units with riskier covenants. warehouses were the highest-performing industrial segment in Q3, with a 2.3% total return on the quarter. Multi-let was The investor buyer pool for multi-let widened in Q3, however, strongest in the South East and London. With rents at all-time consistent with improved confidence in most occupiers. There has highs, capital values are back to their peak or beyond. been an increase in institutional investment activity in particular, along with private equity and property companies. Transaction Industrial yield impact is expected to be negative for 2020 as a volumes for all segments increased to a total of just under £2bn whole, despite the stronger performance in H2. This is forecast in Q3, which is around the five year quarterly average. to generate a 4.2% total return – the lowest since 2012. However, this is set against an anticipated office return of 0.2% and retail The regions outside of the South East had the largest volume of return of -17.8%. Positive industrial rental growth and yield transactions in Q3. Distribution warehouses dominate, with the compression is likely to be sustained into 2021 and drive an Manchester Airport and Symmetry Park deals alone accounting improved 7.9% annual total return.

Q3 quarterly total return by industrial segment Industrial total return and components Sources: MSCI, Gerald Eve Sources: MSCI, Gerald Eve

% per quarter % per quarter 2.4 30

2.2 25

2.0 20 FORECAST 1.8 15

1.6 10

1.4 5

1.2 0

1.0 -5 2014 2015 2016 2017 2018 2019 2020 2021 2022

Rental growth Income return UK multi-let UK industrial Equivalent yield impact Total return UK distr. w/house Outer SE multi-letLondon multi-letInner SE multi-let Rest of UK multi-let

8 INVESTMENT BRIEF Industrial quarterly investment volumes by sector Industrial quarterly investment volumes by location Sources: Property Data, Gerald Eve Sources: Property Data, Gerald Eve

£ billion £ billion 6 6

5 5

4 4

3 3

2 2

1 1

0 0 Q1 2019 Q1 2019 Q1 2015 Q1 2015 Q1 2015 Q1 2015 Q1 2016 Q1 2016 Q1 2018 Q1 2018 Q3 2017 Q3 2017 Q2 2017 Q2 2017 Q3 2019 Q3 2019 Q3 2015 Q3 2015 Q4 2017 Q4 2017 Q3 2016 Q3 2016 Q2 2019 Q2 2019 Q3 2018 Q3 2018 Q2 2015 Q2 2015 Q2 2016 Q2 2016 Q2 2018 Q2 2018 Q1 2020 Q1 2020 Q4 2019 Q4 2019 Q4 2015 Q4 2015 Q4 2016 Q4 2016 Q4 2018 Q4 2018 Q3 2020 Q3 2020 Q2 2020 Q2 2020

Distribution warehouse Standard industrial Portfolio London South East Rest of UK Portfolio

Industrial total returns and components Source: MSCI

%, per month 4

-1

-2

-3

-4 Jul 2019 Jun 2019 Jul 2020 Oct 2019 Jan 2019 Apr 2019 Oct 2018 Feb 2019 Jan 2020 Sep 2019 Jun 2020 Dec 2019 Mar 2019 Dec 2018 Aug 2019 Nov 2019 Oct 2020 Apr 2020 Nov 2018 Feb 2020 Sep 2020 May 2019 Mar 2020 Aug 2020 May 2020

Quarterly income return Quarterly equivalent yield impact Quarterly market rental growth Quarterly total returns

INDUSTRIAL 9 OFFICES

The drop off in activity is particularly stark when compared • Office investment remains lower than during with previous downturns. Current trading as a proportion of the the financial crisis, despite an uplift of activity investment market is less than half of the trough reached during in Q3 the global financial crisis (GFC). However, the occupational market has been buoyed by the various vaccine news and • Overseas investors made majority of acquisitions implied increase in office use in 2021. Reopening of gated funds in Q3, predominately directed at prime as well as several offices currently available for sale, particularly London assets in London, means we expect this trough to be short-lived.

• Our outlook for offices has improved, following Overseas investors continue to be the most active buyer for lower than anticipated falls in rental growth. UK offices. In Q3 they made £1.35bn of acquisitions and £800m of dispositions, increasing their net exposure by £550m. Forecast annual total return is -4.8% for 2020. The primary source of capital was from Far Eastern investors – Singaporean and Hong Kong investors accounted for 57% of all overseas activity. UK Institutions were involved in three of the largest sales to Far Eastern investors and their total dispositions Following record low activity in Q2, office investment increased totalled £604m. by 54% to £2.3bn in Q3. Many of these were transactions that were under offer pre-covid. The buyer pool has shrunk, and the In terms of performance, negative yield impact lessened in Q3 due diligence process has increased the transaction time. as outward yield movement decelerated for almost all UK office This will help some investors be more selective in acquisitions, segments; City yields actually sharpened marginally. Income while others will place onus on guaranteed income over building return broadly offset negative yield impact and rental growth in quality. High quality London offices with strong covenants are Q3, thus UK office quarterly total return was 0.1%. garnering the highest level of interest, while demand for value- add stock across the UK, has become increasingly selective. Gerald Eve’s outlook for UK offices has improved and total return in 2020 is forecast to be -4.8% (up from -5.9%). Some expected falls in rental growth did not materialise, with UK office quarterly investment volumes by type many landlords pushing out incentives to maintain pre-covid Sources: Property Data, Gerald Eve headline rents. Negative yield impact is expected to be -7.1% for 2020 overall, driven by revaluations in peripheral markets with £ billion a high proportion of poorer quality office stock that will require 8 greater capital expenditure.

0 Q1 2019 Q1 2016 Q1 2018 Q3 2017 Q2 2017 Q3 2019 Q4 2017 Q3 2016 Q2 2019 Q3 2018 Q2 2016 Q2 2018 Q1 2020 Q4 2019 Q4 2016 Q4 2018 Q3 2020 Q2 2020

Office Business Park Portfolio

10 INVESTMENT BRIEF Office trading volume index, 6 month rolling average UK oce investment ﬂows, Q3 2020 Sources: MSCI, Gerald Eve Sources: Property Data, Gerald Eve

Q2 2009 = 100 £ billion 350 1.5

300 1.0 250

0.5 200

150 0

100 -10 50 POST-GFC 0 -1.0 Overseas Property UK Undisclosed Occupier Private 2011 2017 2013 2012 2019 2015 2016 2018 2014 2010 2007 2020 2009 2005 2006 2008 2004 Investors Companies Institutions Individual

Acquisitions Dispositions Net Investment

Quarterly UK office total return and components Annual UK office total return and components Sources: MSCI, Gerald Eve Sources: MSCI, Gerald Eve

% % 3 15

FORECAST 2 10

1 5 0

0 -1

-2 -5

-3 -10 2016 2017 2018 2019 2020 2021 2022 2023

Q1 2017Q2 2017Q3 2017Q4 2017Q1 2018Q2 2018Q3 2018Q4 2018Q1 2019Q2 2019Q3 2019Q4 2019Q1 2020Q2 2020Q3 2020 Income return Equivalent yield impact Income return Equivalent yield impact Market rental growth Total return Market rental growth Total return

OFFICE 11 RETAIL

Investment liquidity for shopping centres – the worst- • Investment increased in Q3, but remains performing retail segment – is notably thin. In 2015 and 2016 severely depressed, especially for shopping this segment alone could account for over £1bn of transactions, centres but in Q3 2020 it was only £80m. The key deal of the quarter was Ballymore’s £71m purchase of Broadwalk shopping centre • The short to medium term occupier outlook is in Ealing. This asset was last traded in May 2012 for £68m so, poor as the economic crisis continues to unfold despite the market turbulence, not sold at a loss. and shoppers shift increasingly online Annual rental growth continued to fall into deeper negative • With such a high income return component, territory in Q3, with shopping centres running at -13.5% and investment market stabilisation in 2022 means retail warehouse the least affected, at -8.6%. Anecdotal evidence suggests that late and non-payment of rents has that retail total return will compare favourably not rallied since the beginning of the year. with the other property segments again The further month of UK-wide lockdown and closure of non- essential stores over November will have impacted the start Total investment into retail just exceeded £1bn in Q3 after an of the critical Christmas trading period. Notwithstanding all-time low in Q2 during the main period of the first coronavirus this, there was evidence of faltering retail footfall in autumn lockdown. The small recovery was driven by increased commensurate with the introduction of local tiered restrictions investment activity in the less distressed sub-segments in Q3, that will continue in a stricter fashion after the end of the namely retail warehouses, supermarkets and portfolio deals. second lockdown on 3rd December. The largest retail deal of the quarter was a retail warehouse portfolio bought by M7 for £157m. Store-based spending fell precipitously in March and April and the online component picked up some of the difference in Retail investment transaction volumes are nevertheless severely what appears to be an accelerated move towards a permanent depressed and already were so going into the coronavirus- structural shift. Beyond Christmas, consumer spending will be induced economic crisis in 2020. The average quarterly retail fragile as the furlough scheme ends and unemployment rises in investment over 2015-17 was £2.6bn, but the 2019-20 quarterly H1 2021. Those in more secure jobs and with disposable income average was less than half this amount at £1.3bn. to spend will likely still mostly be working from home and shopping online.

Retail quarterly investment by subtype Retail, spending, selected segments Sources: Property Data, Gerald Eve Sources: Oxford Economics, Gerald Eve

£ billion Real, seasonally adjusted index, Oct 2019 = 100 5 160

140 4 120

3 100

80 2

60 1 40

0 20 Q1 2019 Q1 2015 Q1 2015 Q1 2016 Q1 2018 Q3 2017 Q2 2017 Q3 2019 Q3 2015 Q4 2017 Q3 2016 Q2 2019 Q3 2018 Q2 2015 Q2 2016 Q2 2018 Q1 2020 Q4 2019 Q4 2015 Q4 2016 Q4 2018 Jul 2020 Q3 2020 Q2 2020 Oct 2019 Jan 2020 Jun 2020 Dec 2019 Nov 2019 Oct 2020 Apr 2020 Feb 2020 Sep 2020 Mar 2020 Aug 2020 May 2020

Retail warehouse Shopping centre Supermarket Non-store spending Clothing and footwear – stores High street All other Portfolio Household goods – stores Other non-food stores

12 INVESTMENT BRIEF The medium-term outlook for the retail occupier market and Retail total return is forecast to be -17.8%, in 2020 and continued rental growth is negative. Consequently, retail equivalent yields negative rental growth will keep total return in the low single digits continued to move out in Q3, while office yields were broadly in 2021. The structural retail yield softening that began in early 2018 flat and industrial yields actually moved in. Shopping centre should be broadly complete by the end of 2020, with expected yields have been the worst affected, increasing by 260 basis negative rental growth priced in. With such a high income return points from 6.2% in September 2017 to 8.8% three years later. component, stabilisation in 2022 will push total return up to high single digits that will compare favourably with the other property segments after several years lagging badly behind.

Annual market rental growth Equivalent yields by subsector Source: MSCI Source: MSCI

%, per year % 6 9.0

4 8.5 2 8.0 0 7.5 -2 -4 7.0

-6 6.5 -8 6.0 -10 5.5 -12 -14 5.0 -16 4.5 Q1 2019 Q1 2019 Q1 2015 Q1 2015 Q1 2016 Q1 2016 Q1 2018 Q1 2018 Q3 2017 Q3 2017 Q2 2017 Q2 2017 Q3 2019 Q3 2019 Q3 2015 Q3 2015 Q4 2017 Q4 2017 Q3 2016 Q3 2016 Q2 2019 Q2 2019 Q3 2018 Q3 2018 Q2 2016 Q2 2016 Q2 2018 Q2 2018 Q1 2020 Q1 2020 Q4 2019 Q4 2019 Q4 2015 Q4 2015 Q4 2016 Q4 2016 Q4 2018 Q4 2018 Q3 2020 Q3 2020 Q2 2020 Q2 2020

High street Retail warehouse Shopping centres High street Retail warehouse Shopping centres

Retail total return and components Sources: Gerald Eve, MSCI

%, per year 20

15 FORECAST 10

-5

-10

-15

-20

-25 2014 2015 2016 2017 2018 2019 2020 2021 2022

Income return Yield impact Rental growth Total return

RETAIL 13 14 INVESTMENT BRIEF HOTELS

There are mixed fortunes within the UK hotel sector at present. Coastal hotels and those in regions that traditionally rely on domestic demand are holding up reasonably well. In contrast, London – and, to a lesser extent, the other key UK centres – face much greater headwinds. The London market with its many banqueting and conferencing hotels is contingent on international travel and the local availability of entertainment, restaurants and theatre that coronavirus has denied.

With the second lockdown set to be replaced with ongoing Institutional investors still have cash to invest and still see hotels strict restrictions, the question for many of these hoteliers as a strong segment over the longer term, though the buyer is now whether to close until March 2021, since January and pool is much smaller currently. Some investors are willing to buy February are traditionally very slow, loss-making months long ground rents with hotel exposure, rather than acquiring the anyway. The cost of a closed hotel over winter has non-trivial hotel itself. There have been several such transactions in 2020 expenses attached to it, but operators would really need 20%+ and CBRE GI have some further in the pipeline. occupancy to make it economically worthwhile to re-open. There is overseas (notably Singaporean) investment interest in Conferencing hotels have a typical demand lead time of a year, the UK hotel sector and some will look to take advantage of the so this segment will take a considerable time to get back on its current quieter market conditions to get greater clarity and market feet. Another complicating factor will be the ability to staff such access. There may be a shift of some traditional purchasers to hotels in future. Many staff are from the EU and have returned invest in property types that are similar and they are comfortable home. If they haven’t registered as being in the UK before the with, such as serviced apartments and apart-hotels. Hermes, LaSalle end of the transition period it will be very difficult to re-recruit and Brookfield are looking to pivot into this space. them for the future recovery in the sector. Despite the ostensive damage done to the UK hotel sector over Fortunately, there was underlying strength in the UK hotel the coronavirus crisis, the outward yield shift and corresponding sector going into the coronavirus crisis. Increased overseas fall in capital values has been nothing like that in the leisure and demand for rooms, notably from China and India, will continue retail sectors. Hotel yields are likely to move out only 30bps in to outstrip any increase in supply. Hotels are a cash-generative 2020, compared with 110bps for leisure. business where revenues are received either upfront or paid contemporaneously, whereas costs such as suppliers or staff are In terms of recovery to the strength of the pre-covid period, incurred later. This provides a positive element for a relatively banqueting and conferencing hotels can expect to take 3-5 nimble financial recovery when the markets open up again. years. Good quality London hotels should take 2-3 years. Broadly, any hotel markets that are reliant on international Landlords are relatively low geared (typically sub-60% LTV) so travel will recover relatively more slowly. banks are, for the most part, being understanding. Lenders have effectively given the sector a one year moratorium until March 2021. Since banks have been supportive, there have been extremely few vendors willing to sell at a discount. This may begin to change and there could be more forced sellers in Q1 or Q2 2021.

HOTELS 15 LEISURE

Whilst August’s ‘Eat Out to Help Out’ scheme provided a much-needed boost to the hospitality sector, the imposition of the tiering system and 10pm curfew – followed by a second national lockdown – has proved this short-lived. Over a third of food services operators now have limited confidence that their businesses will survive the next three months and many, such as Cineworld, have already entered CVAs.

Many operators in the leisure sector are in danger of breaching Against such a bleak trading backdrop, investment has loan covenants and September rent collection was around 40%, essentially ground to a halt and leisure property investment the weakest of all property sectors. It has only been those able performance has suffered across all metrics, with total returns to switch operations online or offer takeaway service that have falling a further -2.1% in Q3 to an annual -12.3%. Investor been able to generate any income. Although the moratorium on sentiment has collapsed, with a 100bps movement in equivalent forfeiture for non-payment of rent is still in force, lenders will at yields recorded in 2020. We now forecast a 17.8% fall in returns some point be affected by landlords’ inability to collect rents, in 2020, just shy of the precipitous fall recorded in 2008. which is unlikely to improve by December Quarter Day. Yields are expected to stabilise in 2021 on the back of recent positive news on covid vaccine efficacy, although we envisage it will be late 2021 or early 2022 before capital values stabilise and start to grow positively again.

Business insights and impacts survey: 19 November. Confidence that business would survive the next 3 months Source: ONS

Accommodation and food service activities Arts entertainment and recreation

All industries

020406080 100

No or low confidence Moderate confidence High confidence Not sure

Leisure investment Leisure annual total return and components Sources: Property Data, Gerald Eve Source: MSCI

£m %, per year 1,400 12 10 8 1,200 6 4 1,000 2 0 -2 800 -4 -6 600 -8 -10 -12 400 -14 -16 200 -18 -20 -22 0 2016 2017 2018 2019 2020 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Health & ﬁtness Cinema Restaurant / Bar Other Income return Equivalent yield impact Market rental growth Total return

16 INVESTMENT BRIEF RETAIL 17 CORPORATE FINANCE

2020 has been a very challenging year for the real estate lending market. The combination of two coronavirus lockdowns and the last-minute Brexit negotiations has led to a material contraction in both lending capacity and new business.

According to the Cass Business School UK Commercial Real Estate Report: Mid-Year 2020, 22% of lenders did not do any lending in the first half of 2020 and new loan origination is down 34% based on the same period from the first half of 2019.

This fall in lending has been for several reasons. Lenders have been forced to divert internal resources to processing CBIL’s and Bounce Back Loans, ‘material uncertainty’ clauses have had a negative impact on valuers writing new business and lenders have sought to preserve capital to ensure they are meeting rigorous stress tests.

Loan to values ratios (LTVs) continue to be far lower than they were 18-24 months ago with LTVs of 50-55% ‘normal’ in the current market. This does not reflect the whole market however and well-let assets with strong income may be able to secure and service high LTVs but this is more likely to be for asset classes deemed as lower risk, including residential BTR, industrial or distribution assets and long-let properties to strong covenants.

Borrowing margins have increased across all property asset classes, with margin increases of between 20-50bps not uncommon when compared with 12-18 months ago. Debt funds and UK banks have made the largest margin increases, whereas international banks (excluding German banks) have been at the lower end. Loan pricing for retail assets have had some of the highest margin increases and further increases of around 25bps have been predicted for 2021.

Despite the challenges of valuation, interest payments and increasing margins, lenders have not embarked on the wholesale defaults we saw during the global financial crisis. Lenders are generally now focussed on working with borrowers and are offering covenant waivers in the short-term. Over the next two years we estimate that £9.5 billion of retail assets and a further £13.5 billion of alternative assets like student housing, hotels and care homes need to be refinanced. Many of these facilities will be at 85% to 120% LTV at that time.

With global economies still reeling from the impact of coronavirus, the banking sector will remain cautious in 2021. When the post-Brexit transition period ends at the end of December 2020, markets could face issues dependent upon how European banks operate in the UK. The loss of the passporting rights that allowed financial institutions to sell debt products across the EU could fall away and this could impact liquidity and how lenders deal with existing loan books in 2021.

In 2021 lenders will remain selective as to which asset classes they want to lend in. Well-let industrial and distribution assets and residential development and investment will remain popular because of the lower volatility and defensive characteristics. However, retail and hospitality and single-let assets (generally other than to investment grade covenants) will remain more challenging to finance.

18 INVESTMENT BRIEF The lenders – origination, June 2020 Underwriting – average target lending margin bps Source: Cass Business School Sources: Cass Business School

£ billion Bps 90 400 LTV 58% LTV 56% LTV 58% LTV 58% LTV 57% LTV 58% LTV 57% Fee: 90 Fee: 97 Fee: 91 Fee: 110 Fee: 8 Fee: 105 Fee: 94 80 350

70 300 250 60 200 50 150 40 100 30 50

20 0

10 -50

0 -100 201 1 201 7 2013 2007 1999 2003 201 2 2019 2015 2002 2009 201 6 2005 2018 2014 200 1 2010 2008 2004 2000 2020 200 6

Prime retail UK banks & bdg soc North American banks Prime office Prime industrial Secondary officeSecondary retail German banks Insurance companies Secondary industrial Other international banks Other non-bank lenders Residential investment 2015 2018 2020 2020/2015 change

CORPORATE FINANCE 19 GERALD EVE IN THE MARKET

Electra Business Park Gerald Eve Capital Partners Gerald Eve advised Schroders REF on the sale of this 10-unit Gerald Eve has launched a new business arm focused on estate in Canning Town to SEGRO for £133m, reflecting a acquiring and managing commercial real estate in the UK 2.58% net initial yield. for third-party investors. The team seeks to capitalise on opportunities created by mispriced risk and structural economic shifts. To find out more about how this might help you, please contact Daniel Okin or Charlie Ingham.

Investcorp Aberdeen Standard Investments Will Strachan advised Mileway on the £53.5m purchase of Angus Minford has recently joined Gerald Eve and is marketing seven UK industrial properties from Investcorp. The portfolio Kirkgate, a multi-let town centre office in Epsom on behalf of totalled a combined 692,000 sq ft of industrial space located Aberdeen Standard Investments. in Glasgow, Edinburgh, Liverpool, Warrington, Leeds, South Elmsall and High Wycombe.

20 INVESTMENT BRIEF L&G Investment Management Orchard Street IM John Rodgers advised L&G Investment Management on the Guy Freeman advised Orchard Street IM on the sale of sale of Sainsbury’s warehouse in Bedford, operated by logistics Florey House and John Eccles House, The Oxford Science Park, company DHL, to Blackrock for £90m. to Clearbell Capital.

PGIM Real Estate Gerald Eve Corporate Finance Charles Boyes advised PGIM Real Estate on the first Gerald Eve Corporate Finance has expanded the team with the transaction of their European core strategy, at Centre Square, addition of Gordon Clements and David Shaw. Both David and a 123-apartment build-to-rent scheme in High Wycombe Gordon are experienced real estate bankers and their client acquired off-market from Inland Homes. The development is focus and knowledge will greatly enhance our corporate finance expected to be complete by next March, with £15.75m paid now offering. To find out more about how we can help with your and monthly payments through to practical completion taking debt and equity requirements please contact Gordon Clements the total consideration to £31.5m. or David Shaw.

GERALD EVEFURTHER IN THE INSIGHTL MARKET 21 FURTHER INSIGHT

For more information on individual sectors, please see the following publications:

PRIME LOGISTICS PRIME LOGISTICS MULTI-LET INSIGHT SERIES LONDON MARKETS SOUTH EAST OFFICE The definitive guide to the The definitive guide to the The definitive guide to the Quarterly snapshot of INVESTMENT BULLETIN UK’s distribution property market UK’s distribution property market UK’s multi-let industrial property market London office property Q3 2020 Summer 2020 Summer 2020 Q3 2020 Bulletin Q3 2020

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Prime Logistics Prime Logistics Bulletin Multi-Let London Markets South East Office Bulletin Summer 2020 Q3 2020 Summer 2020 Q3 2020 Q3 2020

LISTED MARKETS – REAL ESTATE September 2020 EURO CITIES EURO LOGISTICS Analysis of the Gerald Eve and Alliance Partners European property markets Coverage of European Industrial & Logistics Market

Leo Zielinski Partner Tel. +44 (0)7980 809031 Spring 2020 Winter 2020 [email protected]

John Rodgers Partner Tel. +44 (0)7810 307422 [email protected]

Will Strachan Partner Tel. +44 (0)7929 885859 [email protected]

Lloyd Davies We track the share price movement and regulatory announcements Partner of 57 real estate owning listed entities (“Gerald Eve tracked index”). Tel. +44 (0)7767 311254 A summary of the Gerald Eve tracked index in terms of GAV, NAV, [email protected] LTV, Dividend, Share Price, Market Cap, Discount/Premium to NAV and their respective weekly movement is attached. This edition Richard Moir Partner provides a comparison to share price data from 3 February 2020 Tel. +44 (0)7771 812249 (pre-Covid-19 level) to 31 August, demonstrating the impact across [email protected] certain entities as a direct result of Covid-19.

Lorenzo Solazzo As at 31 of August, the Gerald Eve tracked index is currently down 32% to pre- Data Analyst Covid-19 levels, under-performing the FTSE350 which is down 20% by comparison. Tel. +44 (0)783 309 5582 The tracked listed REITs share price increased on average 1% since 1 August 2020 [email protected] (March: -25%, April: +6%, May: -3%, June: -3%, July: -1%). The average discount to NAV is currently 29% against 3% pre-Covid-19. James Brown Surveyor As illustrated in the graph below, we have seen little recovery across the various Tel. +44 (0)7464 656563 sector groups since our last report in June. [email protected]

Supermarket 3% Share price impact from 3 February 2020 3% (pre-Covid-19 level) to present day Industrial -3% GERALD EVE SUSTAINABILITY MANUAL INDUSTRIAL REVOLUTION 1% Source: Gerald Eve Research/Publicly Available Information -2% Healthcare -6% -16% Version 1 – July 2020 Technology, innovation and the future of the logistics sector -20% FTSE350

-28% Alternative Sector/Long Income -25% September 2020 -34% Mixed Strategies -32% Internal document – not to be circulated outside of Gerald Eve -30% -32% Gerald Eve Tracked Index

-36% -40% London Strategies

-65% -75% Retail Strategies

-80% -70% -60% -50% -40% -30% -20% -10% 0% 10%

To 30 June 2020 To 31 August 2020

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Listed Markets Euro Cities Euro Logistics Gerald Eve Sustainability Industrial Revolution September 2020 Spring 2020 Winter 2020 July 2020 September 2020

22 INVESTMENT BRIEF CONTACTS

UK Capital Markets Healthcare Capital Partners John Rodgers Richard Moir Daniel Okin Partner Partner Partner Tel. +44 (0)20 3486 3467 Tel. +44 (0)20 7333 6281 Tel. +44 (0)20 7333 6420 Mobile +44 (0)7810 307422 Mobile +44 (0)7771 812249 Mobile +44 (0)7767 671690 [email protected] [email protected] [email protected]

Charlie Ingham London Offices Portfolios Partner Lloyd Davies Leo Zielinski Tel. +44 (0)20 7333 6391 Partner Partner Mobile +44 (0)7747 248714 Tel. +44 (0)20 7333 6242 Tel. +44 (0)20 3486 3468 [email protected] Mobile +44 (0)7767 311254 Mobile +44 (0)7980 809031 [email protected] [email protected] Property Asset Management Jennifer Cottle Alternatives/Long income Leisure Partner Richard Lines Daniel Anning Tel. +44 (0)203 486 3497 Partner Partner Mobile +44 (0)7919 520700 Tel. +44 (0)20 7333 6274 Tel. +44 (0)20 7333 6374 [email protected] Mobile +44 (0)7825 721289 Mobile +44 (0)7776 161821 [email protected] [email protected] International Charles Wilford Hettie Cust Partner Industrial & Logistics Tel. +44 203 486 3484 Tel. +44 (0)20 7333 6215 Mobile +44 (0)7920 267523 Nick Ogden Mobile +44 (0)7774 834113 [email protected] Partner [email protected] Tel. +44 (0)20 3486 3469 Mobile +44 (0)7825 106681 [email protected] Valuations Research Steve Sharman Michael Riordan Partner Partner South East Offices Tel. +44 (0)20 7333 6271 Tel. +44 (0)20 7653 6828 Mobile +44 (0)7508 008118 Guy Freeman Mobile +44 (0)7796 611127 [email protected] Partner [email protected] Tel. +44 (0)20 3486 3471 Mobile +44 (0)7796 813141 Ben Clarke [email protected] Hotels Senior Associate Tel. +44 (0)20 7333 6288 Will Kirkpatrick [email protected] Regional Investment Partner Tel. +44 (0)20 7333 6228 Callum Robertson Oliver Al-Rehani Mobile +44 (0)7836 287983 Senior Analyst Partner [email protected] Tel. +44 (0)16 1259 0480 Tel. +44 (0)020 7518 7255 Mobile +44 (0)7810 655791 Mobile +44 (0)7584 112501 [email protected] [email protected] Corporate Finance Steven Oliver Tel. +44 (0)20 3745 5892 Mobile +44 (0)7908 622355 [email protected]

CONTACTS 23 OFFICES

London (West End) Leeds 72 Welbeck Street 1 York Place London W1G 0AY Leeds LS1 2DR Tel. +44 (0)20 7493 3338 Tel. +44 (0)113 204 8419

London (City) Manchester Bow Bells House No1 Marsden Street 1 Bread Street Manchester M2 1HW London EC4M 9BE Tel. +44 (0)161 259 0450 Tel. +44 (0)20 7489 8900 Milton Keynes Birmingham Avebury House 45 Church Street 201-249 Avebury Boulevard Birmingham B3 2RT Milton Keynes MK9 1AU Tel. +44 (0)121 616 4800 Tel. +44 (0)1908 685950

Cardiff West Malling 32 Windsor Place 35 Kings Hill Avenue Cardiff CF10 3BZ West Malling Tel. +44 (0)29 2038 8044 Kent ME19 4DN Tel. +44 (0)1732 229420 Glasgow 140 West George Street Glasgow G2 2HG Tel. +44 (0)141 221 6397

Disclaimer & copyright Investment Brief is a short summary of market conditions and is not intended as advice. No responsibility can be accepted for loss or damage caused by reliance on it.

The reproduction of the whole or part of this publication is strictly prohibited without permission from Gerald Eve LLP

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