Outlook and Market Insight
The Q3 figures reflect the lighter Covid-19 restrictions over the summer which rebuilt confidence and enabled the practicalities of transactions to happen in comparison to the lockdown conditions of Q2. Investors are learning to live with Covid and the deals over this quarter provide a cross section of investors including overseas, UK fund, property company and Local Authority activity. The latter continues to be conservatively active as they continue to grapple with ways of remedying hefty budget deficits. The market remains primarily a ‘risk off’ led market, however, where ‘risk on’ opportunities properly reflect their inherent risk in pricing there is healthier levels of demand than before.
The £45m forward funding of One Cambridge Square – Cambridge by Schroders UK Real Estate Fund is notable. A rare speculative office funding which forms part of the wider regeneration around the new Cambridge North railway station. At close to 100,000 sq ft it yet again demonstrates the confidence in occupational markets which are heavily underpinned by R&D. It also highlights that demand remains for ‘Winning Cities’ and this can be further evidenced by the interest received on Florey and John Eccles House which GE are selling on The Oxford Science Park.
Q3 2020 saw a new wave of interest for previously launched assets including Mountbatten House, Southampton (purchased by Castleforge Partners) and R+, Reading (recently under offer to Oval) both at prices reflective of current market conditions. The postponement of new stock being launched in Q1 & Q2 has impacted on Q2 and Q3 transaction volumes however there has been an upturn in new sales activity over the last month as vendors look to capitalise on improved activity levels which should bolster the Q4 volumes. We anticipate that property companies and private equity investors will emerge as the dominant buyer pool taking advantage of adjusted pricing.
The lifting of the material uncertainty clause for regional office valuations in August has boosted activity and improved liquidity. It is also an important step forward for open-ended UK property funds to lifting suspensions. To date Royal London, Columbia Threadneedle, St James’s Place, LGIM and Schroders have announced plans to re-open. Institutions continued as net vendors for Q3 2020, accounting for £184.34m of sales. Whilst most of the retail funds remained gated for most of the quarter, many are looking to increase their cash weightings. M&G are an example with R+ in Reading, Wavendon Business Park and 5 The Square on Stockley Park all recently being placed under offer. Focus will remain on ensuring healthy liquidity levels to meet redemption requests and in the short term they look set to continue to be net sellers with a selection of office opportunities being offered across the funds.