Domestic buyers return to the investment market in Q1

UK institutions and REITs stepped up their investment activity in the first quarter of 2017 in a sign of their renewed confidence in the market’s health.

In the first quarter, UK institutions accounted for 21.7% of deals, up from 17.7% over the whole of 2016, and REITs’ share of purchases more than doubled from just 6.1% last year to 13.9%, according to data from Property Archive and Capital Economics.

Capital Economics property economist Eduardo Gorab said the increased acquisition activity from domestic investors was “encouraging” for the market. In 2016, the market became increasingly reliant on demand from overseas buyers, which accounted for just over half of all purchases, as domestic investors sat on their hands amid the uncertainty created by the Brexit vote.

This was highlighted as a potential issue in the Bank of England’s Financial Stability Report at the end of last year, which said: “There is a risk of further adjustment in the commercial real estate market that could create financial stability risks, given the reliance of the market on inflows of foreign capital.”

Gorab said part of the reason for the increased activity from UK investors was the recovery in capital flows in and out of funds.

“In the run-up to the referendum and after, UK institutions saw huge outflows,” he said. “Since that period, we have seen a stabilisation of outflows and even net inflows into these funds.”

He predicted that UK investors’ share of the investment market would continue to rise this year.

Domestic buyers have been particularly active outside London. They accounted for 87% of deals in the South East office investment market in the first quarter, up from 49% last year, according to Knight Frank, which highlighted increased buying from UK funds, councils and developers looking to exploit permitted development rights to convert offices into flats.

Across the UK investment market, deals totalling £11.5bn were agreed in the first quarter, just shy of the long-term average of £11.7bn. A number of large transactions helped boost the total, including the £1.15bn sale of the Cheesegrater to CC Land, one of a growing number of Far Eastern buyers to emerge in the London office market.

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