Q3 2020 has seen an improvement in sentiment with investors and vendors learning to live with COVID-19 and navigating the uncertainty and volatility brought to the market since its effects were felt in early March.
As expected investment volumes remain down on long term average levels, Q3 2020 volumes reached £325m, reflecting an improvement on Q2 (£108m) although this was the lowest quarter on record. However, investment volumes totalled £1.5bn to end September which is only 11% below the same period last year at £1.7bn aided by a strong Q1.
Most notably in Q3, 68% of activity was out of town however, this was driven by the availability of opportunities and associated lot size rather than a long term trend.
The largest transaction to complete this quarter was Straits Capital purchase of Bourne Business Park, Weybridge for £80m. Key transactions also included the Aviva Portfolio purchased by CLS and the speculative funding of 1 Cambridge Square by Schroders displaying a range of buyer types in the market. Straits Capital’s acquisition provided a boost to Overseas investor demand, deploying £129m and accounting for a 40% share, up from 15% in the previous quarter. Activity from Property companies also increased this quarter, accounting for an 18% share of Q3 investment volumes.
Activity from Property companies is expected to continue throughout the remainder of the year as they take advantage of potential pricing adjustments in the market. In addition 12 deals over £40m were transacted so far this year, compared with five of this lot size during the same period last year reflecting resilience in investor appetite.
Despite a return of lockdown measures and increasing COVID-19 cases, looking ahead we expect to see to see an improvement in market activity and continued growth in investor appetite led by real estate returns relative to other asset classes. This is coupled with open ended funds selling short let, cap ex heavy, assets in order to focus on income during the uncertainty of the next 12-24 months.
Prime yields remained unchanged from the previous quarter across the South East office market at 5.25%, underlying the resilient demand for prime and long let assets in the market. However, assets with occupational risk are witnessing price reductions hence the gap between prime and other will widen.