UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021
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UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021 UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021 1
EXECUTIVE SUMMARY
> Rebound in investment activity in Q2 2021;
> Strong performance from UK REITs and direct commercial property over the period;
> Competition and low rates driving aggressive yield compression;
> Scope for further yield compression due to ongoing premium over other asset classes;
> Strong period for industrial property;
> Pressure easing on retail, hospitality and leisure assets but debt problems looming;
> UK house prices expected to cool in H2 2021;
> Limited movements in Prime Central London market due to lack of international travel.
COMMERCIAL PROPERTY
REBOUND IN INVESTMENT ACTIVITY
After an encouraging start to the year, the UK market Although supply continues to be comparatively tight,
continued to display its resilience with GBP 15.2bn of there is no shortage of demand for UK commercial assets
and yields continue to move inwards. International travel
commercial property transactions in Q2 2021, with a
remains restricted though and the anticipated breakout
particular surge of deals in June. This was almost 15% for the market has yet to fully materialise. However, the
ahead of the 10-year average for equivalent periods due progress of the UK’s vaccination programme and the re-
to a number of large portfolio deals concluding over the opening up of the economy following the Government’s
period and demonstrates that the UK market is firmly on much anticipated ‘Freedom Day’ on 19 July gives optimism
that there will be more progress throughout the remainder
the road to recovery following the challenges of 2020. of H2 2021.
UK CRE Quarterly Investment Volumes
20,000
18,000
16,000
14,000
Qtly Investment, GBPm
12,000
10,000
8,000
6,000
4,000
2,000
0
Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21
Source: PropertyData, 2021
2 UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021
TOP 10 LARGEST UK COMMERCIAL
PROPERTY TRANSACTIONS YTD 2021
Building / Price Vendor Purchaser
Location Sector Date
Transaction Name GBPm (nationality) (nationality)
UK Wide Student GCP Student iQ Student (USA) /
Student Portfolio 969.0 Jul-21
Portfolio Accom. Living (UK) Scape Student (UK)
UK Wide Business TPG Real Estate Brookfield Asset
Arlington Portfolio 714.0 Jun-21
Portfolio Park (USA) Mgt (Canada)
City of Trustees of Moise Brookfield Asset
30 Fenchurch St, EC3 Office 635.0 Jun-21
London Safra (Lebanon) Mgt (Canada)
Aldgate
Central Union Investment
1 Braham Street E1 Office 468.0 May-21 Developments
London RE (Germany)
(UK)
Ivanhoe
City of Suntec REIT
3 Minster Court, EC3 Office 353.0 Jun-21 Cambridge
London (Singapore)
(Canada)
Central Student Unite Group PLC GIC Real Estate
Wembley / Whitechapel 342.0 Jun-21
London Accom. (UK) (Singapore)
UK Wide Retail Hammerson PLC Brookfield AM
Retail Park Portfolio 330.0 Apr-21
Portfolio Warehouse (UK) (Canada)
UK Wide Student Fusion Students
Quintain Portfolio 315.0 Apr-21 Lone Star (USA)
Portfolio Accom. (UK)
Morgan Stanley
UK Wide
Logistics Portfolio Industrial 303.0 Feb-21 RE (USA) / Thor BentallGreenOak
Portfolio
Equities (USA) (USA)
UK Wide Student
Nido Portfolio 291.0 Feb-21 KKR (USA) Greystar (USA)
Portfolio Accom.
Data to 01 August. Source: PropertyData, 2021
UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021 3
PUBLIC VS PRIVATE MARKETS
Main UK Asset Classes Total Return Q1 2021 Main UK Asset Classes Total Return YTD 2021
8%
7.3%
7% 12%
10.7% 11.1%
6% 10%
5.6%
Total Return %
8%
5% 6.2%
Total Return %
3.9% 6%
4%
4%
3%
2%
2% 1.6% 0%
1% 0.9% -2% -1.5%
0% -4% -3.2%
UK REITs UK Commercial UK Equities GBP Corp Bonds UK Gilts 5 -10yrs UK REITs UK Commercial UK Equities GBP Corp Bonds UK Gilts
Property 5 -10yrs Property 5 -10yrs 5 -10yrs
Source: MSCI, Morningstar, 2021 Source: MSCI, Morningstar, 2021
UK REITs, along with the wider UK equities market, continued UK REITs were the best performing asset class in Q2 and,
their run of strong performance over Q2 on expectations together with UK Equities, have been the best performing
of an economic recovery and improved occupier conditions asset classes YTD. However, the UK REIT index remains -7%
due to the advanced progress of the UK’s COVID vaccination below its pre-pandemic levels.
programme and the gradual easing of lockdown restrictions.
UK REIT Performance Jan-20 to Jun-21
105.00
100.00
95.00
Return index,01 Jan-20 = 100
90.00
85.00
80.00
75.00
70.00
65.00
60.00
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21
Source: Morningstar, 2021
The private market has also had a strong quarter with a total environment and yields have declined aggressively over
return of 3.9%, bringing year to date performance to 6.2%1. the course of the year as a result. There remains scope for
Momentum has returned and average UK commercial additional yield compression and it is anticipated that there
property values have risen by 3.5% so far this year, driven will be robust growth in the second half of the year, in line
primarily by exceptional returns from the industrial sector. with the forecast recovery in investment activity.
Competition for deals remains intense in this low rate
1
Source: MSCI, 2021
4 UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021
All UK Commercial Property Yields - Last 5 Years
Brexit Vote UK Election Volatility COVID I COVID II
5.30
5.25
5.20
5.15
Net Initial Yield %
5.10
5.05
5.00
4.95
4.90
4.85
4.80
Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21
Source: MSCI, 2021
INDUSTRIAL PROPERTY DOMINATES
UK Property Sectors: Capital Value Growth Q2 2021 UK Property Sectors: Rental Value Growth Q2 2021
6.60% 1.81%
7.00% 2.00%
6.00% 1.50%
5.00% 1.00%
4.00% 0.35%
0.50%
2.60% 0.10%
3.00%
0.00%
2.00%
0.73% -0.50%
1.00%
-0.29% -1.00%
0.00%
-1.02%
-1.00% -1.50%
All Office Industrial Retail All Office Industrial Retail
Source: MSCI, 2021 Source: MSCI, 2021
Industrial/logistics property has had an extremely strong lack of deals during the lockdown period has led to high
Q2, with average values rising by 6.6% and average competition and an aggressive drop in yields as a result.
rents by 1.8%. The sector remains the beneficiary of Average UK commercial property yields had fallen to
the structural shift to online shopping and supply chain 4.86% as at the end of June2 , having started the year at
reform as well as experiencing a short-term demand 5.18%. There remains scope for additional compression
boost due to COVID-enforced lockdowns. We continue to as the spread over other yielding asset classes, such as
favour urban warehouses section due to the critical need corporate and government bonds, remains wide. This
to fulfil the ‘last mile’ of product delivery combined with is one of the key factors supporting the UK and Central
supply constraints and competition for sites from the UK London office markets as investors struggle to find
housing market. equivalent yields elsewhere. A point that is made even
clearer when comparing the UK and London to other
Investor demand for yielding assets also continues to major markets /cities and by evaluation versus real yield
be strong in this low rate environment. The comparative levels (i.e. net of inflation).
2
Net Initial Yield. Source: MSCI, 2021
UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021 5
UK Commercial Property Yields vs. Equities, Gilts & UK Interest Rates
9.0
CRE vs. UK Equities UK Gilts UK Base Rate
8.0
Spread 2.06% 4.10% 4.76%
7.0
6.0
5.0
Yield %
4.0
3.0
2.0
1.0
0.0
Jun 05 Jun 07 Jun 09 Jun 11 Jun 13 Jun 15 Jun 17 Jun 19 Jun 21
FTSE All Share Dividend Yield FT Gilts 5 - 15yrs Redemption Yield MSCI All Property Initial Yield UK Base Rate
Source: MSCI, BoE, DMO, Morningstar, 2020
Retail, hospitality and leisure assets remain under pressure, and look vulnerable to further declines in coming periods.
although the pace of decline has slowed as the UK economy A tight credit environment and a potential wave of loan
gradually re-opened and customer footfall recovered. defaults are also a looming risk. There is almost certainly
These sectors have built up deep problems with rental and further downside until these sectors reach their bottom.
loan arrears accumulating over the course of the pandemic
6 UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021
RESIDENTIAL PROPERTY
The UK residential market continued to experience strong of supportive government policy, low interest rates, elevated
growth over the period, particularly houses in suburban household savings and the Stamp Duty Holiday introduced
locations in response to the various lockdowns imposed by the Chancellor of the Exchequer mid-way through last
over the pandemic. Average UK house prices are now 8.8% year.
higher than they were in June 2020, driven by a combination
UK House Prices, Annual % Change SA
12.0
Stamp Duty Holiday
begins 08 Jul
10.0 9.6
8.8
8.4
8.0 7.5 7.5
7.2
6.9
Anunal % Change SA
6.5
5.8
6.0
5.3 5.3 5.2
4.0
3.2
2.7 2.6
2.0
0.0
Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21
Data as at end Jun-21. Source: Halifax/Lloyds Banking Group, 2021
Although originally due to run until March 2021, the Stamp phased out between 01 July and 30 September.
Duty Holiday was subsequently extended and will now be
UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021 7PRIME CENTRAL LONDON RESIDENTIAL
Although the London market has benefited from same the remained resilient with a good level of activity from mainly
factors affecting the wider UK residential market, the Prime domestic purchasers, leading to a rise of 0.5% in values
Central London (PCL) market has been subdued due to the over the quarter.
ongoing lack of international travel. Even so, the market has
10.0% PCL vs UK Housing
8.7%
8.0%
6.0%
4.0% 3.8%
Price Change
2.9% 2.9%
2.2%
2.0%
0.5% 0.6% 0.6% 0.7%
0.1%
0.0%
-0.5%
-2.0%
-2.2%
-4.0% 1-mth 3-mth 6-mth YTD 1-yr 3-yr ann
PCL UK Residential
Source: Knight Frank, Lloyds Banking Group, 2021
With the continued successful rollout of the COVID-19 trend, with the easing of international travel restrictions
vaccine and staff beginning to return to the office, Prime adding further impetus in due course.
Central London values should continue their upward
8 UK QUARTERLY PROPERTY MARKET REVIEW Q3 2021OUTLOOK
There has been a strong rebound in activity and
performance in Q2 2021 as COVID-related restrictions
have eased and markets return to some level of normality.
Despite good numbers, the post-lockdown breakthrough
has yet to fully materialise but we envisage ‘more of the
same’ in coming months resulting in a strong year for UK
commercial property. Investors should be prepared for
tighter yields and heavy competition for the right assets.
Industrial and income-focused properties will continue to
be the leaders for the foreseeable future as the structural
drivers for these areas remain unaffected by current
events. Despite some improvement in key data, retail,
hospitality and leisure assets will remain under pressure Nigel Burton
over the same time period. Director, Real Estate Investments
After a strong run, the wider UK residential market will Emirates NBD
cool over the course of H2 2021 with the gradual removal 25 Knightsbridge
of stimulus measures. Meanwhile, the PCL market has London
remained subdued but is on an upward trend and will SW1X 7LY
recover swiftly on resumption of international travel.
Telephone: +44(0)207 838 2222
Facsimile: +44(0)207 581 0575
Email: nigelb@emiratesnbd.com
Manu Sahdev
Real Estate Advisor
Emirates NBD
25 Knightsbridge,
London
SW1X 7LY
Telephone: +44(0)207 838 2235
Facsimile: +44(0)207 581 0575
Email: ManuS@emiratesnbd.com
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