Commercial real estate sector outperforms other asset classes

The commercial real estate sector outperformed other asset classes as returns rose by 23.9% over a 12-month period, according to the latest Commercial Quarterly by Cluttons.

London was strong activity, as in Q1 there was £3.9bn invested in the Central London office market versus a 5-year average of £2.3bn.

Given the current geopolitical environment it’s expected that London will continue to attract overseas investment as investors favour stability.

Over the period listed real estate saw rising returns of 21.8%, investment into the FTSE 350 rose by 13.2%, while returns for index linked gilts dropped by 4.6%.

Andrew Mitchell, head of investment at Cluttons said: “London has fared well on the international stage with PwC’s latest survey highlighting it as the most favoured city for combined investment and development prospects for the year ahead, with a degree of positivity reflected by a score well ahead of Berlin’s winning figure last year.

“It retains its status as a global gateway while being seen as better value than other locations. We also know from prior cycles that in times of geopolitical uncertainty locations like London benefit from a flight to quality. The scarcity of prime assets, especially from an investment perspective means demand for this end of the market will be more secure.”

Looking further ahead, Cluttons said there are signs that belief in the arrival of HS2 are beginning to crystallise, which is likely to encourage investors to think differently about some regional markets as transport access opens up.

In line with this thinking Mayfair Capital announced an office investment in Solihull this quarter at Trinity Park. The new HS2 Interchange station, Arden Cross, will be situated under a mile from the office once complete providing a very fast travel time into London.

Historically the full impact of strong employment growth would have flowed through to office demand – it is more difficult to predict in the new hybrid work environment how much of that will translate into higher net absorption rates, but nonetheless strong jobs growth is a positive for the sector.

Mitchell added: “Despite total returns and a strong Q1 for London and Manchester, investment transactions have been very erratic, with both sales volumes and number of transactions varying significantly from quarter to quarter. This, again, reflects the uncertainty that is very much the environment, rather than merely some wild cards.”

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