FULL REPORT
The feared ‘second wave’ has arrived. The UK’s COVID-19 case numbers have risen rapidly, with the numbers continuing on an upward trend. The recent rises are not simply down to increased testing. The number of infections, hospitalisations and number of deaths have all risen. Hospitalisation rates are in fact close to where they were when the UK went into lockdown in March.
As cases have risen, so too have restrictions. In turn, latest mobility data from Google shows visits to retail, recreational and workplaces are now beginning to moderate.
now beginning to moderate.
Fortunately, job losses have been somewhat contained and better than expected, with the headline unemployment rate increasing to 4.5% in August from 3.9% pre-lockdown. The number of vacancies, having reached an all-time low of 343,000 in June, have increased to 488,000 in July to September, albeit 40% below levels a year ago. Despite the increase in vacancies, we do expect the unemployment rate to tick up by the end of the year, somewhere in the range of 10-12%.
Monthly data for August showed GDP increased 2.1% m-on-m. This was largely disappointing particularly for the month of August. The PMI’s, Eat Out to Help Out scheme, easing of restrictions and return to school should have all contributed to better economic growth figures.
Following on from August’s dismal economic performance, downside risks to GDP growth forecasts have risen. Furthermore, the rise in COVID cases means we are only a matter of days away from stricter restrictions being re-introduced which will weigh on growth in Q4.
If matters were not already complicated, the final piece of the equation that will impact UK’s economic growth is Brexit.
Our central case remains that there is enough reason to push for a deal, as the alternative will cause short-term disruption. We believe there is likely to be a thin Brexit deal agreed by the end of the year. Given the current backdrop, it is in the UK’s interest to minimise further disruption. As a result, UK GDP is forecast to fall by -9.7% in 2020, with growth of 6.9% in 2021.
UK investment volume reached £8.0bn in Q3, a 71% uptick on the historic lows of the previous quarter. This reflects an easing of lockdown restrictions over the summer and an increase in investor confidence as pricing uncertainty faded in most sectors. While all sectors saw more transactions, Industrial was the most resilient of the traditional sectors. £1.6bn of industrial assets changed hands over the quarter, 59% up on Q2 and only 6% down on Q3 2019. Despite 18% down on the five-year quarterly average, it was the only traditional sector to remain in line with its ten-year average (+2%).
Alternatives recovered 86% to reach £2.5bn, largely thanks to Westbrook’s £850m sale of the Dolphin Square PRS scheme in London SW1 to AXA REIM and a number of other large BTR deals. While still some way off the levels of activity seen in more recent years, this was 31% above the 10-year quarterly average.
Even so, overall volume was still 43% down on Q3 2019 and 45% below the five-year quarterly average. Volume for 2020 so far now stands at £28.2bn, 20% down on the same period last year, but still 79% above Q1-3 2009.
The overall figures mask the uneven performance between the small and large lot sizes. Year-to-date volume of £100m+ deals is down only 3% y-o-y, but the volume of less than £20m lot sizes is down 44%. This reflects the continuing lack of finance available to private investors at the smaller end of the market.
In London's core office market, investors recorded a number of confidence-boosting deals, most recently Sun Ventures' £600m acquisition of 1&2 New Ludgate, following their purchase of 1 New Oxford Street for £174m in July. Volume so far
this year is still 14% down y-o-y, but those assets coming to market are benefiting from continuing strong demand, which is keeping prime yields stable at 3.50-4.00%.
Lockdowns and economic uncertainty have meant London's tenant space has doubled since Q1, but its leasing market is more diversified than it was in 2009. Yields are at a discount to Europe's core markets, and approximately £4.5bn is currently for sale or under offer in the City alone. We therefore expect the investment market to continue its gradual recovery in Q4.