Perhaps unsurprisingly, property investment activity remained subdued in Q3. Volume was down 19% on Q3 2018, and year-to-date volume is now 26% down on the same period last year. That said, quarterly activity was back in line with the 10-year quarterly average (+2%), largely due to a return of large deals (i.e. £250m plus). Activity in this size band was 16% against the 5-year average, but this was largely due to some substantial student accommodation deals in the Alternatives sector. Investment in the traditional sectors remains on a downward trend. Office investment in 2019 so far is 38% down on Q1-3 2018 (-38%), and Retail and Industrial are down 22% and 24% respectively.
It was a mixed picture at the other end of the market. Volume for smaller deals (under £100m) was down 27% on Q3 last year, but up 6% on last quarter. The Industrial sector was back in line with the 5-year average, reflecting continued investor demand for multi-let estates and urban logistics, but confidence in Retail remains low, and small Office deals activity fell for the third consecutive quarter to the lowest quarterly volume since 2012. While the political and economic situation continues, most sellers will likely choose to hold on to assets to wait for more certainty, which could bring with it a potential increase in values.
Weak Sterling is proving a double-edged sword for the market, particularly in London. It has certainly helped fuel pent-up demand from international investors. However, many US Dollar-based investors who acquired pre-referendum are reluctant to sell, despite favourable pricing, as the resulting currency hit would almost cancel out their profits. Moreover, the current stock shortage means they have little opportunity to reinvest. One vendor pulled its sale of a West End site recently for this very reason, despite receiving over 100 bids.
The occupier market continues to benefit from positive jobs growth and corporate expansion, and a limited development pipeline is keeping vacancy rates low. Take-up in Q3 was 8% up on the previous quarter and consistent with the long term quarterly average (+3%). The Serviced Offices sector accounted for 18% of demand in Q3. 44 deals over 10,000 sq ft have now been recorded so far this year, up from 41 during the same period in 2018. WeWork's expansion was main driver of demand. Given their current challenges, it remains to be seen whether this will continue, but the growing number of operators in this space should at least partially fill the void.
The prolonged uncertainty continues to raise potential challenges that could shock the investment market. For example, a record 12 consecutive months of net withdrawals from open-ended property funds raises the prospect of a liquidity squeeze and some forced sales similar to that seen following the 2016 referendum. Another market shock, such as a No-deal Brexit, could be painful for some landlords, particularly those who have already endured considerable downward pressure on their assets' valuations, notably in Retail.
That said, the attractiveness of UK Real Estate looks set to continue, indeed potentially improve, despite these market risks. The occupational market is resilient, with vacancy rates in many sectors at cyclical lows. Yields continue to show good value, both compared to other European markets as well as other asset classes. Along with low interest rates, this has kept pricing broadly stable and investor demand strong. Should an EU Withdrawal Agreement eventually be approved and signed into UK law, this will likely improve investor confidence, resulting in upward pressure on pricing and a release of more investment stock to the market.