The speed of the vaccine rollout and easing of restrictions bolsters activity in Q2
A rapid increase in the national vaccine rollout alongside the planned irreversible easing of government restrictions has bolstered activity and confidence in the South East office investment market. £1.6bn was traded in Q2, including Brookfield’s £714m purchase of TPG/Arlington’s Atom portfolio (primarily Greater London/South East assets). Excluding this, the investment volume for Q2 was £858m across 37 deals, representing a 50% increase on the £573.1m transacted in Q1. Investors continue to favour income and covenant strength, as they have since the pandemic began, but there is now a much stronger focus on the ESG credentials of assets. The AWULT to expiry for assets traded in Q2 was 7.2 years and has consistently been above 7 years since the onset of the pandemic.
The weight of global capital targeting the UK life sciences sector continues to persist as a dominant theme. There continues to be sharpening of yields and growing investor competition in this segment. Apart from notable elements of the Atom Portfolio, Morgan Stanley’s £50.1m purchase of 101 Cambridge Science Park transacted at a yield 123 bps lower than that quoted, whilst Kadans acquired the Sherard Building, Oxford Science Park for £25.5m reflecting a 3.63% net initial yield. Demand for UK life sciences is unlikely to slow with a shortage of supply for both occupier and investor.
There was a significant increase in activity from the private equity sector in Q2, with discounts being achieved for core plus assets that have remained available for a significant period of time. Some high-profile acquisitions included Global Net Lease’s purchase of McLaren Technology Centre for £170m, Henley/Sixth Street/Colmore Capital’s purchase of New Square Bedfont Lakes for £102m and Oval’s purchase of Ealing Cross for £70.2m.
Overseas investors also remain active with notable transactions including Sidra Capital’s acquisition of Countryside House, Brentwood for £19.4m and Trinova’s acquisition of Centrium 1 + 2, St Albans for £18.1m. Gerald Eve advised on both of these transactions.
With the exception of the Atom portfolio, institutions were the largest net sellers in Q2, accounting for a significant 67% of the transaction volume and 76% of stock under offer. This is largely from the retail funds where redemptions continued, with M&G suffering the same outflow issues others have had upon re-opening. The focus for these funds will remain on ensuring healthy liquidity levels to meet redemption requests and in some cases, implementing closure programmes.
Looking forward, we expect sentiment to continue to improve for the office sector as we head through the year. This will be driven by a post ‘Freedom Day’ return to the office for many and an associated uptick in occupier confidence to commit to new leases. Patient capital remains high and come September vendors should be confident of committing to sales processes as the buyer pool grows.