Unsurprisingly, in the second quarter of the year transaction volumes hit previously unseen lows due to the truly seismic impact of COVID-19. South East investment volumes in Q2 2020 reached £108m, significantly down on Q2 2019 at £398m.
Boosted by robust levels of activity in Q1 however, H1 volumes stand at £1.2bn, up 46% on the same period last year. The pandemic and lockdown froze both the consumer and global economies with direct consequences for operating cash flow and investment volumes. Looking ahead pricing is softening and investment opportunities are beginning to appear.
The largest transaction of the quarter was Brookfield Asset Management’s purchase of Harwell Campus in Didcot for £42m. Asia-Pacific investors were relatively quiet this quarter and as a result, Private Equity investors have been the most active purchasers the second quarter of the year, deploying £65.2m and accounting for a 64% share.
In addition five deals over £50m were transacted in H1 2020, compared with one of this lot size in H1 2019 which reflects resilient investor appetite.
Encouragingly, transactions that were under offer pre COVID-19 are now exchanging, albeit at a discount; Microsoft 4&5, Thames Valley Park trading at a 20% discount and Reading International reflecting a 15% discount. All of these transactions involve varying degrees of occupational risk. The core market is yet to reopen and we would expect this to be more resilient. Whilst we anticipate pricing on prime assets has remained firm however, the definition of prime has tightened.
We believe there are reasons for optimism. Real estate continues to offer an attractive yield relative to other asset classes, many investor hurdle rates are not aggressive having been set ‘late cycle’ pre COVID-19 and interest rates will remain low over the short to medium-term. Furthermore, despite debt availability being thinner, all in rates where available are similar to the beginning of the year, as swaps have reduced.