There was a notable drop-off in commercial real estate (CRE) investment volumes in the third quarter; down by 23% from Q2 and by 20% against the same quarter last year.
It’s possible to read this as part of an established trend, with each quarter this year delivering less than the one before. However, it would be premature to draw any firm conclusions, given that the year-to-date total is easily ahead of the same period in 2014, a year which finished with a record level of investment. Any decline should be seen in the wider context, with the £13.3bn recorded in the last quarter higher than that recorded in any of the 25 quarters between Q4 2007 and Q4 2013. In fact, Q3 was 30% ahead of the average quarterly rate over the last 15 years.
Nonetheless, there are a number of underlying themes which may have implications for the market going forward. Two notable trends have been the increasing market share of overseas investors, who this year have accounted for half of all investment in the UK, and the growing appetite for alternative sectors. Alternative sectors have accounted for almost a quarter of all investment this year, continuing a persistent trend from a low of 5% in 2010 and well above the pre-crisis high of 15%. The two trends overlapped in the four largest deals of the year, between them accounting for more than £4.7bn of investment. These deals in fact have very little to do with the mainstream UK CRE market, with all involving the acquisition of established and branded management platforms providing income flows directly from thousands of individual consumers.
Of more relevance for mainstream CRE sectors, the once apparently endless supply of UK CRE non-performing loan portfolios seems to be finally drying up. The £2.3bn sale of Project Churchill by Aviva in September may well prove to be one of the last such deals of significant scale in this cycle. Recent evidence suggests that the major private equity buyers are now looking to fill their real estate allocation elsewhere in Europe, with notable activity in Ireland, Italy and Spain. However, there is now a significant flow of assets coming out of previous UK portfolio sales, and this flow is only likely to increase over the next 12 months as the buyers look to make a return on their investment. Whilst many of the crown jewels from these portfolios have already been flipped, the real test of the market will come with the high volume of more secondary assets still to work their way through the system.
Tom Sharman is head of strategy and insight – real estate finance for Royal Bank of Scotland