Property-Market-Update-Q1-2020.Pdf
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IAL & C RES ER ID M E N M T I O A C L Market Update Q1 2O2O Commercial & Residential Contents O1 The Economy O2 City and City Fringe Investment Market O3 City and City Fringe Letting Market O4 West End Investment Market O5 West End Letting Market O6 National Investment Market O7 Commercial Auction Market O8 Residential Development Market O9 Residential Investment Market 1O Student Housing Market 11 Build to Rent Market 12 Residential Auction Market 13 Business Rates Covid-19 Update 14 Lease Consultancy - Update for Landlords Market Update Q1 2020 | O1 Economic Overview The onset of the Covid-19 virus, which to the former growth trend next year although it has been classified by the World Health is clear the economy is to take a major hit in the Organisation as a worldwide pandemic, has meantime. caused a major global crisis. The escalation of infections in the UK led to the introduction In response to the crisis the new chancellor of lockdown measures on 23 March, which has coordinated a range of economy boosting remain in place today, and the rise in the measures to support jobs and business, initially death toll has caused widespread concern. estimated to cost circa £350Bn. These are The political uncertainty of 2019 is a thing of combined with the Bank of England’s reduction in the past and whilst we saw a short window of interest rates by 65bps to a record low of 0.1%. “normal” business activity in the early part of The reduction in interest rates and increase the year, business and economic activity is in government spending would, in normal now much reduced and a period of recession circumstances, provide huge economic impetus, is expected globally, and for the UK economy. however, many commentators are concerned that the cost to be borne by the public finances will be The measures to combat Covid-19 have felt over a generation to come. placed major restrictions on business, and life in general, and whilst the rate of infection The Covid-19 crisis has dealt a major economic in the UK appears to be stabilising, and the shock which the real estate markets are still curve flattening, it is not fully clear as to when absorbing and are reacting to. We at Allsop and how the restrictions will be released. The have adapted and are working remotely and lockdown has been extended for at least a business is continuing as best we can despite further 3 weeks to the early May bank holiday the lockdown and the restriction on movement. and then a gradual release is expected. The Business carries on, but it is different, we have current disruption will therefore continue in the held successful online commercial and residential short to medium term and whilst there will be auctions which have demonstrated the market an economic rebound in due course there is to be very much alive and our private treaty likely to be a degree of ongoing fallout in some and professional teams are working hard and sectors. transacting too. The best assets, as happens in any crisis, hold up well and are increasingly From late February the equity markets have sought after, but those difficult secondary fallen heavily, as has the oil price and sterling properties lacking sustainable occupation are too has declined albeit recovered some ground being hit hard. Many will find it tough out there in recent weeks. Further volatility in the but there will also be plenty of opportunities as we financial markets is expected in the near term. adjust to a new world on the other side. The back drop for the UK economy at the start of the year was one of expected low growth. Prior to Covid-19 growth in 2020 was forecast at 1.1% but this is certain to be lower now. The OBR has estimated a 12.8% decline in GDP over the course of the year Ed Dunningham assuming a 3 month lockdown and 3 months DL +44 (0)20 7543 6739 of partial restrictions. It also estimates a return [email protected] | Market Update Q1 2020 Market Update Q1 2020 | O2 City and City Fringe Investment a further two years when the tenants will due to lack of available product rather than vacate, offering a refurbishment opportunity demand. thereafter. HB Reavis completed its off market purchase of Quick & Tower House, EC2 for For the first time since the EU referendum £65M which reflected c. £460 per sq ft based in 2016, the early signs of 2020 suggested Following one of the highest transaction purchase of the remaining 50% interest in on the consented scheme of approximately prime City yields might dip below 4.0%-4.25% volumes ever experienced in the two weeks Watermark Place, EC4 for £252M/ 4.62%/ 140,000 sq ft NIA. The existing, two adjoining for the first time since 2007. However, the before Christmas in Q4 2019 after the positive £929 per sq ft. The River Thames fronting buildings benefit from around 12 months limited number of opportunities has failed to General Election result, much of the pent up freehold is let to Nomura Properties Plc of income before potential to build out the provide significant evidence of this, although demand during 2019 was particularly active for a term to 2029 (with a tenant option fully consented new build scheme, which we may see evidence in the second quarter to extend for 5 further years) and marked at the start of Q1 2020, but with very limited is located where the City of London meets for ‘best in class’ assets let to blue chip the continued resurgence of activity from buying opportunities. Shoreditch. tenants such as One London Wall Place, German funds, following Deka’s purchase EC2, which we understand has recently gone The first quarter was typically subdued in of two assets in 2019. Union Investment Q1 2020 saw the return of many of the UK under offer at yield of significantly below 4%. terms of available product, with the early continued its buying activity later in Q1 institutions seeking assets in London once transactions of the quarter being those agreed 2020 with the purchase of Goldman Sachs again, having previously adopted a more It is too early to declare exactly how much of in December 2019, in a market where owners & Greycoat’s Procession House, EC4 cautious approach with the looming threat of an impact the coronavirus pandemic will have have been reluctant sellers, primarily due to for £140M/ 4.49%/ £1,330 per sq ft. The redemptions pending the December election. on the City of London investment market, lack of opportunity to reinvest, but also due to newly refurbished long leasehold interest UBS purchased 70 Wilson Street, EC2 from nor for how long. However, short term signs lack of performance in other asset classes at was multi-let for 12 years to the earliest Columbia Threadneedle for £93M/ 4.90%/ indicate there are a number of ongoing deals fund level. The global Covid-19 has caused determination and demonstrated the strong £1,250 per sq ft which provided a term being put on hold, with any new sales being much transactional activity to grind to a halt demand for long let, newly refurbished certain of c. 14 years at the newly developed put on hold also, as the logistical impact of during the final weeks of Q1 2020 as the prime assets. The Procession House and freehold, where the majority of the income the lockdown takes its toll. The debt market market adjusts to unprecedented times. Watermark Place deals brought Union derived from WeWork. BA Pension Trustees has also suffered, with many lenders finding Investment’s total investment to nearly purchased a development opportunity at Ted it difficult to price opportunities and some The City of London recorded a total of 20% of the total transaction volumes for the Baker’s HQ, The Ugly Brown Building, St withdrawing from the market temporarily. £1.955Bn exchanged or completed over 23 quarter. Pancras Way, NW1 for £78.75M. The Ugly There remains a weight of capital wishing to transactions during Q1 2020, which was 46% Brown Building sale involved a short term invest in London, with most of this monitoring down on Q4 2019 and 26% lower than the The continued strength of the occupational leaseback to Ted Baker with an option for the situation closely and being opportunistic. £2.321Bn that transacted during the same market across the City of London and them to re-occupy the building again following quarter last year. This quarter’s turnover surrounding sub-markets ensured the comprehensive redevelopment. was only around 2% less than the long term demand for ‘value add’ and development average of circa £2Bn however, with Q1 deals was at an all-time high during Following what was widely deemed a The average deal size typically experiencing the lowest total volumes Q1 2020. With several large tenant positive election result for the Real Estate of the year historically speaking. All of the requirements and very limited options, sector in December 2019, many overseas for Q1 2020 was £85M, transactions that took place in Q1 2020 were developers have fought over opportunities investors returned to the market believing deals which were available during 2019 to capture this demand in what is one London represents good value compared to demonstrating the demonstrating the lack of newly available of the strongest pre-let markets ever other global markets such as Paris, Berlin, continued demand for product in early Q1 2020, in particular.