Commercial property investment activity in the UK fell by more than 60% in Q2 compared with the same period last year, according to the latest EMEA Capital Markets – Market Snapshot published by Colliers.
In Q2, around £6bn worth of deals transacted in the UK, with the drag on deal making caused by persistently high inflation and concerns around how high interest rates might rise.
Colliers said buyer focus has shifted towards value-add opportunities, with more than half of the £2bn of assets currently under offer in the London office market classed as value-add. The company added the market for core assets “remains sluggish” due to the “wide bid/ask spreads”.
Across the wider EMEA region, commercial property activity continued to be “dampened” in Q2 due to “pricing uncertainty and tighter financial conditions”.
The company’s data shows industrial and logistics remained the sector of choice across the region, with I&L pricing adjusting more quickly to the “turbulent macroeconomic picture” and rental growth encouraging a higher volume of transactions.
Luke Dawson, head of global and EMEA capital markets at Colliers, said: “Deal making continues to suffer as buyers and sellers differ over asset valuations, as reflected in continued bid-ask spreads. Many investors remain reluctant to place major portfolios and assets on the market when limited buyer appetite and financing constraints make their desired prices challenging to achieve. At the moment, the sweet spot for transactions seems to be between €20m-€60m.”
As Europe moves into the summer vacation season, Colliers said it did not expect to see an upswing in overall activity until Q4 2023 at the earliest, by which time it is expected interest rates will have peaked.
Damian Harrington, head of research, global and EMEA capital markets at Colliers, said: “The Fed and ECB recently increased central bank policy rates by a further 25 basis points (bps) in July to stay on top of inflation, and we expect the UK Bank of England decision to follow suit. This would bring the all-sector yield gap for Europe down to, or almost, zero as of end Q2 2023.
“The positive side of the story is that the US and UK are closing in on peak rates, and the ECB not too far off, so investors can start looking forward to rates dropping back in the year ahead. When that will be is up for debate, and we could see further pricing adjustments short-term. The cost of rolling over debt should bring more assets to market, particularly in Germany and the Nordics where value corrections and exposure to debt are high.”
