Outlook and Market Insight
At the end of Q1 2020 the unabated spread of Covid-19 meant unprecedented action had to be taken on a global scale. Lockdowns were enforced in over 100 countries by the end of March 2020 affecting billions of people and severely impacting the global economy. The global pandemic sent shockwaves across the entire real estate spectrum. Q2 2020 will indeed go down in history as a quarter dominated by uncertainty and a government-enforced lockdown like never before seen.
As a result, the south east office investment market in Q2 was characterised by investor caution. Government restrictions and lockdown measures prevented physical inspections and resulted in material uncertainty clauses being inserted into valuations, and in turn, most retail funds had to be gated. Stock markets tumbled as everyone tried to second-guess just how big the impact on the markets and consumer behaviour would be.
Towards the end of Q1 there were circa £775m of transactions under offer and around 2/3rds of these went on hold with transaction volumes for Q2 only totalling £231m across 13 deals, a 77% decrease on Q1 2020 and a 62% decrease on Q2 2019. This is the lowest quarterly volume that we have recorded as the south east office market has suffered from increased buyer caution and a lack of forced vendors willing to accept price reductions.
In Q1 2020 29 properties were brought to market, 7 of which are currently under offer, whilst 2 have since completed. Q2 was in stark contrast to this as only 7 properties were brought to market, highlighting the clear change in vendor confidence. Overall the total number of offices currently under offer in the south east market has reduced to approximately £367m across 22 deals.
The most notable transaction to have exchanged in Q2 was Tristan / Alchemy buying Reading International for c£120m, which is viewed as a big positive for the market. Despite the prevailing conditions, an investor being able to complete a business plan underwrite on an asset where there is occupational risk illustrates buyer commitment to the sector. Whilst there is a delayed completion and a NDA to hide any discount, it highlights underlying investor confidence in the occupational market, supported by historically low vacancy rates pre-Covid-19.
Rent collection statistics for the office market as evidenced in Remit Consulting’s survey demonstrated that offices were the strongest performing asset class by a wide margin (71%) in terms of March rent collection when compared with the industrial (62%) and retail (47%) sectors. Despite this, investors remain cautious on the longer-term impact of Covid-19 and rent collection at the June quarter day will be an important barometer of the health of UK plc, especially given the ongoing removal of landlords’ rights to enforce payment.