Portfolio Investment Market – Q2 2018

Key themes

High transaction volumes

The momentum in the portfolio market has continued from the record year of 2017 (where £14.4bn was transacted). To date, 2018 has seen £6.24bn of portfolio transaction volumes across all sectors with 52 deals recorded, an increase of 32% compared to the same period in 2017 and above the long term average.

Divergence between sectors

It is difficult to talk about the portfolio market in general terms as investor demand is fragmented by sector and quality. The headlines mask the disparity between the industrial and alternative sectors which have been extremely active on the one hand and the retail and mixed portfolio sectors, where transaction volumes are at an all-time low.

Alternative sector dominates

A total of £3.81bn, or 61% of the total volume, was transacted in the alternative portfolio market in 2018 to date making it the dominant sector for the past four years. The sector sees the largest individual transactions with four deals over £350m with an average lot size across the sector of £190m.

Industrial sees record activity

Investor appetite for industrial portfolios has accelerated over the past 12 months as investors continue to be attracted by strong fundamentals that this sector offers. In total £1.63bn was transacted over 21 portfolios – more than double the number of transactions compared to the same period last year. There is depth in investor interest across all risk types: development, value add, core plus and core opportunities.

The importance of portfolio composition

During 2017 and H1 2018, 1 in 5 business space portfolios were either withdrawn, broken up or cherry picked. This highlights the importance of creating a liquid selection of assets from the beginning and carrying out sufficient pre-marketing due diligence.

2018 very quiet for listed activity

Buying activity in 2018 to date by listed entities is down 50% compared to the same period last year. 2017 was the year of the listed sector with c.£3bn raised from both IPOs and equity raises and was second largest buyer type of portfolios (after private equity) accounting for 20% of the buyer market. Eight listed entities used portfolio transactions as a ‘seed’ for an IPO and successfully list on the stock market or as a means to grow GAV through the issuance of shares across 25 deals. We expect an increase in listed activity into 2019 but conversely see more corporate M&A and public to private deals driven by pressures that go hand in hand with sizeable discount to NAVs for certain entities.

Prevalence of restricted or off market transactions

Four in every five business space portfolio deals were either transacted off-market or via restrictive marketing campaigns. This compares to just 25% of deals in 2015 and 50% in 2016. This is due to fewer ‘one-off buyers’ in the market compared to 2015/16 where the eventual buyer could have been one of a dozen new entrants. In certain sectors, the buyer universe is now well defined enabling a more targeted and efficient marketing strategy. This is particularly evident in the office sector where all bar one transaction was either off market or via restricted marketing.