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An alternative future for commercial property

DIVERSIFICATION throughout commercial property portfolios, by private and institutional investors, is a long-standing tactic but has tended to centre around a select number of core commercial real estate classes.

That has changed in the post 2008 environment, as the industry has seen a growing appetite from investors in ‘alternative commercial property assets’ and the rise in levels of investment in these asset classes across the UK and Ireland is starting to be felt north of the border here in NI.

Figures announced for the UK mainland at the start of this year show that in the first quarter of 2019 investment in these alternative real estate assets, such as hotels, private residential, student accommodation and care homes, reached a record 42 per cent share of the overall UK investment market for the quarter. Analysts report that this has been the highest share on record following 29 per cent and 35 per cent growth in this sector in quarters three and four 2018.

The proportion of Northern Irish investment transactions that fall into the alternative category doesn’t presently come close to this level, but there is no doubt that alternative property assets are increasingly piquing the interest of those investing in the province.

The proliferation of hotel investments in Belfast city centre across the past 24 months is well documented, in parallel with heightened investor interest in student accommodation as the Ulster University campus takes shape on Royal Avenue.

Unfortunately, the unexpected delay of construction at the university campus served to cool the later for a time, but several significant student accommodation schemes are now nearing completion with others coming online as the construction of this vibrant new part of Belfast city centre proceeds.

Other ‘alternatives’ including build-to-rent schemes that facilitate city centre living as well as alternative uses of traditional retail spaces that incorporate leisure facilities, entertainment and community alongside healthcare provision are becoming increasingly attractive to investors in the province as the The Belfast Agenda strives to make Northern Ireland’s capital home to an additional 66,000 people by 2035.

Residential letting schemes in Belfast with concierge services, gyms and residents’ lounges may be a novelty today but based on the wider UK and Irish markets the time when these represent a solid investment, even for the risk-averse institutional investor, might not be too far away.

Markets are changing, as are attitudes, incomes and the priorities of the people in general. Almost 25 per cent of UK households are expected to be living in rented accommodation by 2030, so it is unsurprising as models like build-to-rent start to become more common other ‘alternative’ investment options will follow suit.

By Declan Flynn

Source: Irish News

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Commercial property sales fall for second quarter but Glasgow bucks trend

Commercial property sales values in Glasgow surpassed those of Scotland’s capital for the first time since 2015, new research has found.

Analysis of Q2 2019 data by the Scottish Property Federation (SPF) showed that the total value of commercial property sales in Scotland continued to fall.

At £614 million, sales were the lowest in five years. While sales values fell, the number of transactions increased, indicating a decrease in higher value transactions rather than a lack of activity.

However, Glasgow broke from the national trend with the total value of commercial property sales rising against both the previous quarter and the same quarter in 2018. Sales in Glasgow totalled £172m for Q2, accounting for 28% of Scotland’s total commercial property sales.

Edinburgh lost its dominance to Glasgow in Q2 2019, following a significant fall in the total value of commercial property sales. At £108m, Edinburgh’s sales values decreased by £156m on the previous quarter and £14m on Q2 2018. The proportion of Scottish commercial property sales located in Edinburgh fell from 35% in the previous quarter to just 18% for Q2 2019.

SPF director David Melhuish said: “Glasgow was very impressive this quarter, outperforming Edinburgh for the first time in four years against a wider Scottish market that saw a reduced value of sales activity.

“Glasgow’s sales increase was fuelled by a number of £5m-plus deals, totalling £129m, whereas Edinburgh only secured £33m in the same category.

“A notable feature of Scottish commercial property investment in the Q2 period was the rise of capital sourced from Asia, which topped £250m for the first time on record, according to CoStar data.

“Ryden reported a standout £48m transaction for a Korean client of Knight Frank Investment Management.”

Source: Scottish Construction Now

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Commercial property: Build-to-rent is a growing family affair

Research by the Institute of Fiscal Studies suggests that owning their own homes is no longer a priority for younger generations, particularly those in the 25-to-34-year-old bracket.

But renting is not just for singles or couples. Families are increasingly turning to the private rental sector, with a five per cent rise in Scotland over the last last year and three and four-bedroomed houses generating the steepest growth in rent.

This is where build-to-rent (BTR) comes in – homes which are built to a high standard specifically for the long-term rental market.

Up until now, BTR developments have captured a completely different market, but if it continues to deliver only for young professionals it will not achieve its full potential.

Families who cannot afford to buy their own homes are looking for security and are much more likely to settle for longer periods, providing a steady income stream for large-scale investors.

This is ideal for BTR developers who offer greater security to renters, with specialist operators rather than local factors managing accommodation.

On the regulatory side, there have been some notable moves in the last few years to support the case for family-friendly BTR.

Local authorities were given the power to create Rent Pressure Zones (RPZ) in December 2017, capping rent growth at four per cent per annum in areas where rents were at risk of overheating.

This is particularly important for Scotland’s cities showing strong growth – including Edinburgh – with population growth forecasted at 7.7 per cent by 2026.

Perversely, by smoothing out the inflation and deflation cycle, RPZ provides greater levels of security for tenants and specialist landlords relying on a long-term investment.

The balance of risk between tenant and landlord has also shifted, with all leases in Scotland now based on a lifelong security of tenure.

Landlords can no longer terminate a lease on “no fault” grounds. Again, specialist landlords see this as underpinning the case for providing suitable and family-appropriate private rental accommodation.

Developers and investors should also take heart in the fact that a tax incentive, whereby six or more dwellings can be treated as non-residential thus exempting them from LBTT, is now in force.

This, coupled with economies of scale and efficacious modern methods of construction, is strengthening the business case for BTR in Scotland.

Some 6,300 BTR units are currently at various stages in the planning process, with developments such as Candleriggs Court in Glasgow and Lochrin Quay in Edinburgh, already complete.

A successful and inclusive BTR sector in Scotland is a win-win-win for policy makers and the Scottish Government, which is keen to meet ambitious housing targets; for developers and investors, who are seeking to capitalise on the growing demand for larger private rental accommodation, and especially for the growing family of Scotland’s renters.

By HEATHER PEARSON

Source: Scotsman

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Commercial property investment surpasses £100m in 2019

COMMERCIAL property investment in the north has surpassed £100 million this year, according to a new industry report.

The latest data from Lisney reveals a better than expected last quarter, with the recorded £60m investment between April and June 9 per cent up on the same period in 2018.

The resilient performance brings the total value of transactions in the market for the first half of 2019 to £101m.

The largest deal completed in the second quarter was Citi’s purchase of its Belfast office in the Titanic Quarter for £34m, with other notable transactions, including the sale of Antrim Business Park of £12.5m and the £5.25m acquisition of Timber Quay in Derry.

A total of £45m worth of commercial property was on the market in the last quarter, including the Great Northern Tower and Boat in Belfast, along with Clandeboye Retail Park in Bangor.

PwC’s decision to acquire additional space and occupy the entirety of its new 155,000 sq ft Merchant Square Belfast headquarters pushed take-up within the sector to 75,171 sq ft in the three months to June. That being said the total is down on the previous year, while a shortage of Grade A office space within Belfast city centre continues to be a challenge for the market until new stock comes online later this year.

The struggling retail sector was boosted by Primark’s opening of a second city centre store at Fountain House on Donegall Place and the expansion of its Abbey Centre outlet. In relation to the industrial sector, the biggest letting of the year was a 113,550 sq ft site on the Lisdoart Road in Ballygawley.

Declan Flynn, managing director of Lisney Northern Ireland, said the local market continues to perform admirably in spite of the uncertain political climate

“We’re continuing to see healthy levels of local activity at a smaller lot sizes with pricing remaining resilient. That said the appetite of external investors is undoubtedly hampered in the current climate,” he said.

“This is understandable as the capital markets reflect the risk associated with Brexit. The retail sector continues to be a major talking point as the sector remains in the midst of a correction, given how our volumes have been traditionally dominated by retail this is a particularly pertinent for the Northern Ireland commercial property market.”

By Gareth McKeown

Source: Irish News

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Commercial property: Lack of supply demands developments

There is no shortage of investors and developers looking to gain exposure to the Edinburgh office market.

However, as many landlords opt to hold on to their investments – attracted by rental growth and yield compression, there is a growing appetite to refurbish or redevelop older buildings in the Capital to meet the demand for quality office accommodation.

Edinburgh is experiencing historically high levels of occupier demand from a wide variety of sectors, with employers attracted by the city’s talent pool and the quality of life in the Capital.

However, the office market faces dwindling supply and we anticipate seeing a spike in rents as tenants compete for limited space.

Rents for grade-A offices in the city centre are currently around £35 per sq ft and could top £40 next year.

At present, there is little more than 250,000sq ft of prime office space available in Edinburgh and the two speculative developments currently in the pipeline – 
62 Morrison Street and 
20 West Register Street – are mostly or completely pre-let.

The Capital has lost more than 1.2m sq ft of office space to alternative uses in recent years, while take-up is running at 1m sq ft a year.

This poses two big questions: where will the money go? And where can thriving businesses house their growing numbers of staff?

Professional and legal services, the burgeoning tech sector, and a financial industry that continues to thrive – the market has rarely looked so good from an investor’s perspective.

Companies don’t want to relocate, even partially, because the city and lifestyle are key attractions for the talent that is the lifeblood of these service sector businesses.

But there are few – if any – sites in the city for large-scale speculative development still available.

Where possible, landlords are either substantially refurbishing older buildings or selling up, thereby avoiding construction and letting risks.

Competition for refurbished space is likely to hot up as the shortage becomes more acute; we are starting to see businesses actively competing for the best office locations.

Beyond that, the obvious escape valve for city centre-based companies lies to the west, around South Gyle and Edinburgh Park.

With excellent connectivity to the city and available space, we anticipate increasing demand and more interesting developments.

However, the city centre remains the most prized location for wealthy and ambitious, people-focused companies, and – where possible – older buildings will make way for more contemporary offices.

The re-development of Haymarket has been a start, but with investors poised and firms demanding more space, the next few years should see more interesting developments appearing.

Demand for office space around Edinburgh is likely to keep outstripping supply. As a result, rents look set to keep moving higher, especially as the city’s tech start-ups mature into larger companies, with a need to attract talented people.

By ELLIOT CASSELS

Source: Scotsman

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Investor enthusiasm for UK commercial property slumps

Investor enthusiasm for commercial property in the UK has slumped further as sentiment swings towards France and Germany.

Only 27 per cent of international professional real estate investors said the UK is their preferred market, down four per cent in the last 12 months as Brexit uncertainty continues to weigh on investor sentiment.

Meanwhile support for the French market saw a 20 per cent year-on-year increase and appetite for German investments rose by seven per cent, according to the latest commercial property investment barometer by real estate platform Brickvest.

There was also a drop in the volume of assets under management that investors are planning to plough into real estate over the next year according to the quarterly survey of 6000 international professional investors.

Investors are planning to commit 2.5 per cent of their total AUM, a drop of 33 per cent on the planned amount of 3.7 per cent in the second quarter of last year.

Brickvest chief executive Emmanuel Lumineau said: “The latest figures of our Barometer reveal the continued negative effect of Brexit uncertainty on the UK commercial property market among international investors and particularly those based in France and Germany.

“We can expect this to continue over the third quarter and the October deadline at the very least.

“In the meantime, France and Germany are becoming more attractive destinations for international real estate capital.”

By Jess Clark

Source: City AM

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Post-Brexit binge in commercial property?

Pent up demand could see a boost to the commercial property market post-Brexit, according to new analysis of the commercial property market from Shawbrook Bank.

The ‘UK Commercial Property Market Report1, produced by Shawbrook Bank and compiled by the Centre for Economics and Business Research (CEBR) assesses the state of the current commercial property market, exploring the various sub-sectors comprising the market, historic and future trends, and the impact of the changing political landscape.

The Shawbrook report shows that uncertainty over Brexit has weighed on the commercial property sector in recent quarters, as owners and tenants take stock. But despite activity slowing, the market remains a profitable place to invest and deliver a solid income over the medium to long term. Over the past 18 years, the commercial property market has returned 308% to investors compared to 209% for the FTSE100, and yields have remained stable; average yields across the commercial property sector have stood nearly unchanged at 5% since 2015.

Rob Lankey, Director of Commercial Property Investment, Shawbrook comments: “Although uncertainty is present, the commercial property market remains fundamentally resilient in terms of both yield and capital growth. Despite investors taking a wait-and-see approach, we believe many are stockpiling cash and simply postponing activity until we have a definitive Brexit outcome.

“With the long-term view and fundamentals of the commercial property market still compelling, I would go as far to say that we will see a ‘post-Brexit binge’ from professional investors looking to utilise the cash they have stockpiled to take advantage of investment opportunities in the post Brexit landscape. However, not every commercial property investment will automatically generate great returns. Doing your homework on potential investments is more important than ever. There are good and bad opportunities within all sectors.”

Factories, warehouses and other industrial properties have shown the most resilience

Underpinning the resilience of the commercial property market are factories, warehouses and other industrial properties, which over the past few years have become the best performing sector over one, three and five years, with yields in line with the commercial sector more broadly2. Stockpiling activity and strong demand for warehouses from online retailers have helped the sector to withstand economic headwinds to date, however, the unwinding of the stockpiling effect poses a risk to this asset class as does a no-deal Brexit, which would severely harm many of the manufacturers that are the current tenants of the industrial assets.

Table 1: capital value growth across industrial, retail and office properties

Capital value growth
Cumulative capital value growth Industrial Retail Office
One year: Jan 2018- Jan 2019 12% -8% 3%
Three years: Jan 2016- Jan 2019 31% -11% 5%
Five years: Jan 2014- Jan 2019 71% 1% 37%

Table 2: (Initial) yields across industrial, retail and office properties

(Initial) Yields
Industrial Retail Office
Jan-19 4.6% 5.7% 4.5%
Jan-16 5.4% 5.3% 4.0%
Jan-14 6.6% 5.7% 5.1%

 Growing popularity of serviced offices

In the office sector, demand has been strong following the recovery from the last recession. The increasing importance of professional and business services for the UK’s economy provides a strong macroeconomic background for assets in this category and growing popularity of serviced offices is becoming particularly important as new business start-ups and smaller businesses struggle to keep up with rising rents in cities such as London and Manchester and as a result are looking for more flexible spaces.

Retail needs to adapt to remain relevant

For retail properties, a number of factors have come together to create a ‘perfect storm’. On the back of a decade of very low real wage growth, consumers have turned away from the high street and increasingly do their shopping online. Recent research on high streets in Great Britain by the ONS shows that over half (56%) of addresses on high streets are now residential.3

Rob Lankey adds: “The challenges faced by retail won’t be solved by a shift to residential, but the trend will be a significant boost to opportunities for property owners. Irrespective of broad capital value trends, retail property can continue to provide strong rental returns for landlords where the combination of tenant and property location are meeting modern consumer demand. For investors of mixed-use space to realise the full benefits that can be had, there will have to be a level of collaboration in the property sector moving forward. Another beneficiary of the declining high street will be for shared office spaces, such as WeWork which would likely use former retail premises in UK town and city centres”.

Shawbrook Head of Products & Markets, Daryl Norkett adds: “Broadly, if we look at the sub-sectors that are performing today and consider the analysis brought to life in this research, there is opportunity for experienced investors to grow and diversify their portfolios. However, it is important to highlight that the current market requires a certain level of expertise, knowledge, understanding and commitment of time in order to make the right property investment decisions but if you do your homework, it can be a great investment.”

Source: Property 118

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Sharp fall in Scottish commercial property market

An analysis of commercial property sales during the first quarter of 2019 from the Scottish Property Federation (SPF) claims that total the value of sales in Scotland fell by 21 per cent compared to the same period in 2018. The drop in value was largely driven by fewer high-value transactions for this period, with the number of £5m+ sales down by nearly one-third compared to Q1 2018.

The SPF analysis shows a 21 per cent (£203m) year-on-year decrease in sales by value in Q1 2019, with the value of commercial property sales in the quarter totalling £763m. The SPF also reported £3.03bn in property sales across Scotland for the last four quarters, the lowest rolling annual total since Q2 2014.

Property data experts at CoStar reported a similar decrease in investment in Scotland in Q1 2019. Investment volumes fell compared to Q4 2018 and Q1 2018 by 41 per cent and 54 per cent, respectively. CoStar points to investment into alternative assets as the key driver of activity in Q1 2019, with below average investment into Scotland’s industrial and office sectors.

Edinburgh bucks the trend

Edinburgh showed a break from the national trend in Q1 2019, with higher values than the same quarter in 2018. The Capital recorded a total value of £264m in commercial property sales, accounting for 35 per cent of the total value of commercial property sales in Scotland.

Aberdeen also saw commercial property sales recover against the previous quarter, with an increase from £14m to £41m. However, year-on-year, the total value of Aberdeen’s sales fell sharply by £125m.

Glasgow experienced a decrease in the total value of sales by £26m (15 per cent) from the previous quarter but rose by £49m on Q1 2018. Nineteen per cent of the total value of Scotland’s commercial property sales in Q1 2019 occurred in Glasgow, totalling £171m.

David Melhuish, Director of the SPF, commented: “The sales report for Q1 2019 shows a clear fall in total value of commercial property sales compared to the previous year. This aligns with investment data suggesting a subdued start to 2019 for the Scottish commercial property sector.

“However, the sales data does underline the current strength of Edinburgh’s commercial property market, with the Capital accounting for 35 per cent of the Scottish market by value. The investment data also highlights the rise in investor appetite for alternative property asset classes, such as hotels and build-to-rent. For investors, Edinburgh remains a hotspot, while more broadly, low growth and lack of certainty in the economy is weighing down on activity.”

By Neil Franklin

Source: Workplace Insight

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Commercial rent disputes drop to five-year low in Scotland

The number of commercial rent disputes reaching a third party in Scotland fell to its lowest level for more than five years, according to analysis from Knight Frank.

Figures obtained by the independent commercial property consultancy from the Royal Institution of Chartered Surveyors (RICS) showed that the number of cases being referred to third-party dispute resolution dropped from 169 in 2017 to 123 in 2018 – down just over a quarter, 27.2 per cent.

This is less than half, 42.1 per cent, of the 292 cases that went to independent assessment in 2016. It is also below the figures for 2015 (155), 2014 (125), and 2013 (147).

Independent experts or arbitrators are appointed to cases where commercial tenants and landlords cannot agree on a new rental agreement at a fixed-term rent review date. Typically, these are conducted every five years, depending on the terms of an occupier’s lease.

Most reviews state that the rent can only increase – not decrease. This is distinct from lease renewals, where the parties can agree whatever rent deemed appropriate, subject to prevalent market forces, local supply-demand dynamics, along with other factors.

Andrew Hill, partner at Knight Frank, said: “In the aftermath of 2008, most businesses became used to their rents reducing or staying the same. However, in 2016 we saw a spike in the number of third-party applications, as the market showed continued improvement and landlords in turn became more bullish in their aspirations on rental growth. This was disputed by tenants who had become accustomed to rent stagnation.

“Since then, the occupier market in Scotland’s central belt has become even tighter for both offices and industrial premises. Despite a challenging macro-economic environment, sentiment has continued to improve and there are real constraints on availability. As a result, it looks like we have hit another tipping point: generally, businesses appear more minded to accept rent increases provided there is compelling comparable evidence, as quality space remains at a premium.”

The numbers come against the backdrop of a tightening supply of available office and industrial commercial property space.

In Edinburgh, office lettings completed between January and March 2019 saw Grade A availability fall to only 235,000 sq. ft. – the equivalent of just one year’s Grade A take-up. Knight Frank predicted that, combined with other factors, this will drive prime office rents to £36 per sq. ft. by the end of 2019.

Despite a below-average first quarter for take-up in Glasgow, new Grade A availability – excluding refurbished properties – fell to 33,353 sq. ft. Headline prime office rates currently sit at £32.50 per sq. ft. in the city centre for new accommodation and £30 per sq. ft. at refurbished premises.

Mr Hill added: “Another factor at play is the risk and cost associated with pursuing a third-party award or determination. Arbitrators can attribute near all the third-party cost to the unsuccessful party, which can be a real sting in the tail for an organisation challenging and then losing a case against a rent increase. That can be a real deterrent at a time when much of the comparable evidence supports rent increases in prime locations.

“Of course, it’s not the case across the board. Retailers located beyond the main thoroughfares, in particular, are mostly seeing rents stagnate or even go into reverse. Prime offices and industrial, however, are still subject to a real lack of available space which, all things being equal, should put upwards pressure on rents for the foreseeable future.”

Across the UK, RICS said it had seen an average 6 per cent rise in commercial rent review applications from 2013-2017, while there was a 12 per cent decline over the last 12 months.

spokesperson for RICS commented: “The commercial rent review market moves with how the economy behaves – the last 12 months have been challenging for the sector.

“There is a significant change in retail habits with increased demand for online purchases, large retailers falling into administration, underperforming retailers being bought out – some at low-cost – and retailers merging operations. Overall, there is a desire for shorter leases and the commercial market has seen parties move towards lease renewals.”

By Andrew Hill

Source: Scottish Legal

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Commercial property investment falls as Brexit impasse continues

Commercial property investment across the Midlands has fallen as the ongoing Brexit impasse continues to have a negative impact on the market, a new report has revealed.

Lambert Smith Hampton’s (LSH) latest UK Investment Transactions(UKIT) report, says that at £10.9bn, Q1 investment volume across the UK dropped to its lowest quarterly total since the aftermath of the EU Referendum in Q3 2016.

Heightened investor caution in the weeks leading up the UK’s scheduled exit from the EU has clearly been reflected in investment activity. £10.9bn of assets changed hands in the quarter, 26% below average and a substantial 34% below Q4 2018, the largest recorded quarter-on-quarter percentage fall in five years.

Adam Ramshaw, LSH’s regional director for the Midlands, said that in Birmingham and the West Midlands a total of £313m of investment deals were completed in Q1, compared to £470m in Q4 2018. Compared to the same quarter last year there was a 33% drop in investments, with a 54% decrease on the figure for Q4 2018.

Across the East Midlands, there was investment of £197m in Q1, a year-on-year decrease of 67% and a 66% drop compared to Q4 2018, added Adam.

The national impasse was most clear with larger lot size deals. Q1 saw only 19 transactions in excess of £100m, the lowest number since Q4 2012 and significantly below the quarterly average of 31. That said, the total numberof recorded deals in Q1 was only 15% below average, indicating a stronger tolerance to current uncertainty across the wider market.

The market was in some respects turned upside down in Q1. For the first time on record, the three traditional core sectors accounted for less than half of volume. Offices took the brunt of the drop-off in Q1, with volume at a ten-year low of £2.7bn, down a substantial 60% quarter-on-quarter and reflecting a moribund period for large-lot size deals in Central London.

Meanwhile, a perfect storm of structural change and Brexit uncertainty saw retail volume sink to its lowest quarterly total on record, at just over £1bn. Industrial volume dropped to £1.4bn in Q1, far removed from the record £2.2bn in Q4 2018 but only 18% below the trend.

Other sectors proved notably more resilient. Hotel & leisure volume of £2.6bn in Q1 was its strongest quarter in 13 years, boosted by a number of portfolio deals and the UK’s largest deal in Q1, Queensgate Investments’ £1.0bn acquisition of the Grange Hotel Portfolio. Collectively, the specialist sectors also bucked the trend in Q1, with volume of £2.7bn being 35% above average and fuelled by twelve Build to Rent forward funding deals.

The heightened caution in the UK market in Q1 was evident across each of the main investor groupings. Quoted property companies were the least acquisitive buyers compared with trend, with volume of £680m at below half the average, followed by UK institutions where volume of £2.0bn was 35% below average. While investment from overseas investors was also subdued by recent standards, tellingly, they remained major net buyers of UK property, to the tune of £3.3bn in Q1.

The All Property average transaction yield moved out by 14 bps in Q1 to stand at 5.48%. While all the main sectors moved out, retail saw the largest outward movement of 68bps to stand at an average of 6.21%.

Ezra Nahome, CEO of Lambert Smith Hampton, said: “Q1 turned out much as we expected, with investors of all persuasions opting to take a backseat in the crucial run-up to the UK’s scheduled EU exit date. For the first time ever, the so-called alternative sectors collectively accounted for well over half of total volume, a telling reflection of the direction of travel in the market and the insatiable demand for long-income deals.

“While many will be relieved the UK avoided a no deal Brexit outcome, frustratingly, the EU’s extension to later in the year will only act to preserve uncertainty in the market. Despite the generally sound fundamentals of UK real estate investment, this is likely to prove detrimental to the rebound in volume we had been expecting for the latter part of 2019.”

By Rachel Covill

Source: The Business Desk