FOTBW_PPT_Feb_2023

10/02/2022

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14 FEBRUARY 2023

YOUR EXCLUSIVE REAL ESTATE CAPITAL MARKET UPDATE. INCLUDING YOUR THREE MINUTE AUDIO. LISTEN IN!

10/02/2022

Executive Summary

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SUMMARY EXECUTIVE

Total Return

Net Initial Yield

10yr Gilts

GDP

3.3%

1.0% One Year

0.1%

0.2% One Year

-3.3% -10.1%

5.1%

4.4% One Year

One Month

One Year

One Month

One Month

One Month

KEY POINTS

PERFORMANCE

Quarterly investment volume (£m)

Total return (% y/y)

- Investment volumes for Q4 reached just £10.6 billion, the lowest quarterly volume since Q2 2020. 2022 was a tale of two halves; muted H2 investment volumes were in sharp contrast to a buoyant H1. Annual investment volumes totaled £66 billion, 16% below 2021 and 1.6% below the 10-year average.

£25,000

-8% -6% -4% -2% 0%

-2.6%

-3.7%

£20,000

-7.2%

-12.9%

£15,000

-14.9%

-16% -14% -12% -10%

£10,000

- The spike in bonds that we saw as a result of the mini-budget has been mitigated, with ten-year gilts down to 3.3% as of the time of writing.

£5,000

Industrial

Retail

Specialist

Central London Offices

National Offices

£0

- After a period of inactivity, there are signs of liquidity in the market, although there continues to be a gap between buyer and seller expectations.

2006 2008 2010 2012 2014 2016 2018 2020 2022

Source: Real Capital Analytics

Source: MSCI UK Monthly Property Index, December 2022

Total Return -1.9% One Month

Income Return 0.3% One Month

Yield Impact -2.2% One Month

Rental Value Change 0.2% One Month 1.1% One Year

CENTRAL LONDON OFFICES FLY ON THE BROKERS' WALL

-7.2% One Year

3.6% One Year

-11.2% One Year

Source: MSCI UK Monthly Property Index, December 2022

VIEW ON THE GROUND

DEAL WATCH

PRICING Initial yields (%)

Investment activity during the final quarter of 2022 noticeably reduced, both across the quarter and the year. A total of £1.6 billion traded in Q4, a significant 46% decline on Q3 and the lowest Q4 total since 2008. However, despite this and given the strong start to the year, full-year investment totalled £12.7 billion, which was 1% ahead of 2021 but 23% behind the 10-year annual average of £16.4 billion.

Fenwick, New Bond Street, W1 Lot Size: £430m Yield: n/a

Outlook

Jan 2023 Oct 2022

West End

3.75% 3.75% Outward

City

4.50% 4.25% Outward

Status: Sold Comments: Mixed use development opportunity

LIQUIDITY TRACKER Volume by status (£bn)

As a result of the well-documented headwinds and economic turbulence facing the market, particularly during the latter half of 2022, prime yields across both the West End and City markets were pushed out by 50 and 75 basis points during the year, to 3.75% and 4.50% respectively.

Fen Court, 120 Fenchurch Street, EC3 Lot Size: £312.5m (50% interest) Yield: 4.37% Status: Sold Comments: Multi-let building with 14.2 years unexpired sold off-market

£4.1

Available

There were 33 transactions completed in Q4, of which just four achieved in excess of £100 million, the largest being Lazari’s acquisition of Fenwick, New Bond Street, W1 for £430 million. To date, there has been limited evidence of distressed transactions, which is positive news for the market. However issues concerning the cost of debt and ability to finance will remain at least for the first half of 2023, and will ultimately impact volumes. Strong appetite for prime assets and those offering a ‘brown’ to ‘green’ opportunity remains, and liquidity is starting to return to the market, with a handful of deals done in January. However, in the short-term, there is still limited new stock in the market, following trends seen during the end of 2022, particularly those that fall into the larger lot size price bracket and of high quality. Furthermore, the decoupling of value between the top and bottom end of the market is apparent, and we see both demand and values diverging. Due to the depreciation of sterling in recent months, there is a currency opportunity for overseas investors, who will continue to seek out income-generating assets across the capital, and this will ultimately drive up total returns. Looking further ahead, and into what forecasts suggest will be a recession recovery phase in late-2023/early-2024, central London offices will continue to remain a long-term stability play for many investors, encouraged by prime rental value growth which is evident in the market and easing of finance costs.

Bid

£1.0

Under Offer

£2.2

Foley Street, W1 Lot Size: £80m Yield: 4.4% Status: Available Comments: Long-let, well located building in Fitzrovia with a lease term of c. 20 years

Source: Cushman & Wakefield

Quarterly investment volume (£m)

£12,000

£10,000

19 Charterhouse Street, EC1 Lot Size: £54m Yield: 4.70%

£8,000

£6,000

Status: Sold Comments: FH, value add opportunity from 2025 in prime Farringdon. Purchaser: Morgan Capital

£4,000

£2,000

£0

2010

2015

2020

Source: Cushman & Wake f i e l d Resea r ch

Source: Cushman & Wakefield

Source: Cushman & Wakefield

Total Return -3.8% One Month

Income Return 0.5% One Month

Yield Impact -3.9% One Month

Rental Value Change 0.1% One Month 1.5% One Year

NATIONAL OFFICES FLY ON THE BROKERS' WALL

-12.9% One Year

5.6% One Year

-17.1% One Year

Source: MSCI UK Monthly Property Index, December 2022

VIEW ON THE GROUND

DEAL WATCH

PRICING Initial yields (%)

While the national office market in 2022 experienced the highest H1 investment volumes transacted since 2018, activity in the second half of the year was the lowest since 2008. The final quarter of the year was particularly sluggish, with £1.0 billion transacted – the lowest quarterly volume since 2013. Over 2022 as a whole, £7.3 billion was transacted, 21% down on the 2021 volume (£9.2 billion) and 19% below the 10-year average of £9.0 billion. As evidenced by key deals across the markets, prime yields are tentatively levelling out this year, having been pushed out by 100-125 basis points during 2022. Tier 1 cities – Birmingham, Edinburgh and Manchester – remained at 5.75% in the first month of the year, whilst Tier 2 cities – Glasgow, Leeds and Bristol – stood at 6.00%.

Nestle HQ, Gatwick Price: £57.5m Yield: 6.63%

Outlook

Jan 2023

Nov 2022

Manchester

5.75%

5.75%

Stable

Status: Sold Comments: Nestle HQ with 9.8 years unexpired. Sold by C&W in Dec.

Stable

Edinburgh

5.75%

5.75%

Stable

Birmingham

5.75%

5.75%

Stable

Bristol

6.00%

6.00%

Stable

Glasgow

6.00%

6.00%

Dalton Place, Manchester Price: c.£44.3m Yield: c.5.75%

Stable

Leeds

6.00%

6.00%

Greater London

Stable

6.00%

5.75%

Status: Bidding stage Comments: Interest on the property is reportedly closer to an 8.0% yield.

In January La Française Real Estate Managers acquired the recently refurbished 101 Barbirolli Square, Manchester. The 87,000 sq. ft building sold for £47.0 million at a yield of 5.7% (initially expected to achieve 4.50%) which is seen as a benchmark for the prime Tier 1 market.

101 Barbirolli, Manchester Price: £47.6m Yield: 5.70%

Vendor expectations and what buyers are willing to pay remain divided, weighing on transactional activity. Dalton Place, Manchester is one example of this, with the current owners Tesco Pension Fund marketing the 76,800 sq. ft property at £44.3 million, seeking a 5.75% yield while the market is coming in at 8.00%+. The building is let to WeWork until 2038. It remains to be seen as to whether pricing will move out more toward market expectations, or remain in line with values put forward by the vendor. There is tentative evidence that improving liquidity is being seen for prime opportunities which meet highly defined criteria on income length, covenant strength, ESG, build quality and location. Buyers looking at secondary stock are attributing a significant risk premium and consequently whilst the outlook for prime yields is stable, secondary markets are expected to see values slip over the year ahead.

Source: Cushman & Wakefield

Status: Sold Comments: Multi-let with 4.8 years unexpired to break. Sold off market.

Quarterly investment volume (£m)

£5,000

£4,000

Halo, Bristol Price: £70.35m Yield: 5.75%

£3,000

£2,000

Status: Bidding stage Comments: Newly built in 2022 with excellent ESG credentials. Multi-let with 10.56 years WAULT.

£1,000

£0

2010

2015

2020

Source: Real Capital Analytics

Source: Cushman & Wakefield

Source: Cushman & Wakefield

Total Return -4.6% One Month

Income Return 0.4% One Month

Yield Impact -5.5% One Month

Rental Value Change 0.5% One Month

LOGISTICS & INDUSTRIAL FLY ON THE BROKERS' WALL

-14.9% One Year

-24.9% One Year

10.3% One Year

3.8% One Year

Source: MSCI UK Monthly Property Index, December 2022

VIEW ON THE GROUND

DEAL WATCH

PRICING Initial yields (%)

2022 proved to be a tumultuous year for the sector - building on a record 2021, Q1 2022 observed the highest quarter of investment activity on record, and through the first 4-5 months new benchmarks were reached across a range of product. The result of such interest in the sector saw yields reach 3.2% at the end of Q1 before decompressing by 15bps during Q2 to 3.35%. During the second half of the year previously strong sentiment began to give way to mixed market views, caused by a combination of declines in e-commerce levels and falling share prices of some retailers, 3PLs and logistics focused REITS. This was bolstered by wider economic uncertainty, which began to induce deal friction and deferred spending. The market has been quick to react to such structural shifts and despite some apprehension during H2 the market has seen a degree of stability return as a result of wide-spread repricing. With the cost of debt structurally increasing, and instability still lingering within the bond markets, the sector has moved quickly to ensure buyer and vendor aspirations are aligned. Prime logistics yields moved out approx. 150bps from Jan to Dec '22, with the vast majority of this decompression taking place during Q4. Evidence suggests yields have now plateaued, and in fact there are some suggestions that prime yields could move in. Recent key transactions include Smyths Toys in Corby which has completed to Leftfield at 4.55%. This offered 8 year income but with a highly reversionary passing rent with an open market review in 3 years time. Additionally, 14 years of income let to Brakes in Reading has been acquired by Aviva at 4.69%, although there is an outstanding review taking the reversion to approximately 5.5% immediately. There is now a relative positivity returning to the sector. Whilst values have fallen sharply, the UK market has benefitted from a faster reset than some European peers and there are a wide range of buyers seeking a return to the market including UK and European funds. Whilst supply of stock remains constrained, volumes are expected to normalise this year, albeit with a larger gap between prime and secondary pricing than has been seen in recent years. .

Smyths Toys, Corby Price: £30.50m Yield: 4.55%

Feb 2023 Oct 2022

Outlook

Multi-let prime Greater London

4.50% 3.85%

Stable

Multi-let South East

4.75% 4.00%

Stable

Status: Sold Comments: 8.3 years unexpired with highly reversionary rent – headline reversionary yield of c.5.75%. Acquired by Leftfield.

Multi-let Regional

5.25% 4.35%

Stable

Distribution prime long income

4.75% 4.00%

Stable

Distribution prime medium income

5.50% 4.50%

Stable

Distribution prime short income

6.00% 5.00%

Stable

Brakes Bros., Reading Price: £46.50m Yield: 4.69%

Status: Sold Comments: 14.3 years unexpired with an outstanding review providing immediate reversion to c.5.50%. Acquired by Aviva.

Junction 6 IE - Birmingham Price: c. £58m Yield: sub 4.50%

Source: Cushman & Wakefield

Quarterly investment volume (£m)

Status: Under offer Comments: Fully let multi-let estate 2.7years to breaks, highly reversionary yield of c. 6.50%

£8,000

£6,000

Thames Gateway Park - Dagenham Price: £99.45m Yield: 4% Status: Sold Comments: Reversionary yield of c. 5.6% with 5 lease events before the end of 2023. Acquired by Boreal.

£4,000

£2,000

£0

2010

2015

2020

Source: Real Capital Analytics

Source: Cushman & Wakefield

Source: Cushman & Wakefield

Total Return -2.1% One Month

Income Return 0.5% One Month

Yield Impact -3.2% One Month

Rental Value Change 0.0% One Month 0.2% One Year

RETAIL FLY ON THE BROKERS' WALL

-3.7% One Year

-9.8% One Year

6.3% One Year

Source: MSCI UK Monthly Property Index, December 2022

VIEW ON THE GROUND

DEAL WATCH

PRICING Initial yields (%)

Having seen some positive signs throughout early 2022 the retail sector closed out the year in a subdued manner owing to widespread uncertainty and tough trading conditions. However, the occupier market has seen a number of green shoots emerge throughout the year, and in some cases, rental growth has once again been observed. Although headlines may point to challenging conditions, trading over the Christmas period was largely positive, and some additional market indicators lean in the sectors' favour. The relationship between in-store and online retail has showed signs of volatility throughout the year, highlighting the importance of physical locations as a key pillar of omni-channel. In addition, weekend footfalls are generally above their 2019 pre-pandemic levels, with the majority of footfall impact being observed during the working week. Despite this, corporate distress and the cost-of-living crisis, remains a key concern for investors and fears of insolvency and bankruptcy has seen landlords place greater scrutiny on retailer covenant. Despite these tough conditions carefully considered capital continues to target the sector particularly focussing on opportunistic and value-add opportunities, where hands-on asset management can unlock further potential. The Shopping centre sector saw a total of £1.23bn transact during 2022 over 58 Centres, ahead of the £1.08bn 5 year average. In the Retail Warehouse sector £3.37bn transacted over 152 deals, falling just below the 2021 level, but significantly ahead of the £1.83bn recorded during 2020. Like the majority of property markets, the retail sector is in the midst of a substantial repricing exercise which has been ongoing since the middle of 2022. It is expected that the repricing within the sector will be less severe than other sectors, as a result of the yield decompression already observed during the Covid-19 Pandemic. Smaller lots remain liquid whilst the cost of debt is hampering liquidity for larger lots. Looking forward to 2023 it is expected that economic stability will bring with it renewed interest in the market, and that strong returns available within high quality stock will start to look attractive to investors taking a longer-term view once again. .

Supermarket: Tesco, Melton Mowbray Lot Size: £13.75m Yield: 5.40% NIY Status: Completed (November 2022) Comments: 15 years UXT, 5 yearly RPI-reviews (0 4% c&c). Acquired by Tesco. Retail Park: Solartron Retail Park, Farnborough Lot Size: £34.825m Yield: 7.65% NIY Status: Completed (December 2022) Comments: Prime Bulky park, acquired by British Land Shopping Centre: Churchill Square, Brighton Lot Size: £220m Yield: 7.00% NIY Status: Marketing Comments: Core Plus retail with Value-Add development site Shopping Centre: Golden Square, Warrington Lot Size: £22.5m Yield: 12.00% NIY Status Completed (December 2022) Comments: Dominant local centre, receivership sale

Outlook

Jan 2023 Oct 2022

Supermarkets

5.00% 5.00%

Stable

Retail Parks (Open)

6.25% 6.25%

Stable

Retail Parks (Bulky)

6.75% 6.25%

Stable

Shopping Centre (Regional)

8.00% 7.75%

Stable

Shopping Centre (Sub-regional)

11.00% 11.00%

Stable

Shopping Centre (Local)

12.00% 12.00%

Stable

Source: Cushman & Wakefield

Quarterly investment volume (£m)

£6,000

£4,000

£2,000

£0

2010

2015

2020

Source: Real Capital Analytics

Source: Cushman & Wakefield

Source: Cushman & Wakefield

Total Return -0.9% One Month

Income Return 0.5% One Month

Yield Impact -1.6% One Month

Rental Value Change 0.0% One Month 1.6% One Year

SPECIALIST SECTORS FLY ON THE BROKERS' WALL

-2.6% One Year

6.1% One Year

-10.7% One Year

Source: MSCI UK Monthly Property Index, December 2022

VIEW ON THE GROUND

DEAL WATCH

PRICING Initial yields (%)

Residential: £4.01bn was invested into BTR in 2022, 5% below 2021. Q4 2022 saw a big drop off, with £330m transacted. Sentiment has improved, but the lack of deals is causing pricing issues and making investors nervous. Despite debt costs, yields are likely to have only moved 25-40 bps since September. A large amount of capital, a lack of opportunity and strong rental growth is preventing large price falls. The Patrizia, Realstar and Package Living deals demonstrate little yield movement. C&W is launching a funding deal in Guildford and relaunching Greenman Lane, key deals to watch. Student: 2022 was a record year with £7.5bn invested. A large chunk was Greystar & GIC acquiring from Brookfield (£3.3bn), without that Q4 would have only had £400m transact, the lowest in 10 years. There is a stalemate in the market with lots of capital to deploy but a need for pricing to move. On the other hand, stock isn’t coming to the market, rationale is to wait for rental growth to come through (8 10% forecast this year) and hopefully see utility costs fall, and therefore even if yields move out, values will not have fallen significantly. There are a couple of funding deals and stabilised investment opportunities in the market, with a need for a first mover to step in and decide pricing. Healthcare: Healthcare (Propco) saw £2.15bn invested in 2022, down slightly on 2021 (£2.45bn). Primary Care experienced a strong year with £300m invested, C&W sold 28% of that, which was Project Bell. Care Homes remained robust with £1.4bn invested (most in Q1-Q3), specialist healthcare investment funds and REITS were the main players. Private Hospital investment was down in 2022 with £360m invested, there were no major big deals. CareTech Holdings was the biggest deal in 2022, £870m deal to take it private. Special educational needs schools are a big growth area. There is an estimated £3bn of capital committed to Integrated Retirement Communities, but there is difficulty finding supply, with most entry routes via development. Hotels: There was little activity in the back end of 2022. Regional yields have softened by 100-125bps, less so in Prime London. There has been limited stock coming to the market and we expect to see that continue until there is consensus between buyers and sellers on where pricing sits. A key deal in 2022 was the sale of The Dilly to Fattal Group, a £90m deal with a further £90m planned in CapEx. Cushman & Wakefield acted on the sale side. . Source: Cushman & Wakefield

BTR: Guildford Station

Feb-23

Dec-22 Outlook

Lot Size: £68m

Student Accom (Greater London)

4.00-4.25% 4.00-4.25% Outward

Yield: 4.15%

Student Accom (Prime Regional)

5.25-5.75% 5.25-5.75% Outward

Status: Coming to the market

Build to Rent (Greater London)

3.50-3.90% 3.50-3.80% Stable

Build to Rent (Prime Regional)

4.00-4.90% 4.00-4.80% Stable

Comments: Purpose Built BTR funding of 179 units – C&W selling

Care Homes (Prime)

3.75-4.00% 3.75-4.00% Outward

Care Homes (Prime SPV)

5.50-5.75% 5.50-5.75% Outward

BTR: Uncle Leeds

Primary Care Modern Purpose Build

4.00-4.25% 4.00-4.25% Outward

Lot Size: £108m

Primary Care Secondary Non Purpose Build

5.50-5.75% 5.50-5.75% Outward

Yield: sub 5%

Private Hospitals (Greater London)

4.00-4.25% 4.00-4.25% Outward

Status: Sold

Private Hospitals (Prime Regional)

5.00-5.25% 5.00-5.25% Outward

Comments: Realstar has agreed a forward funding deal for the 2nd phase – 488 BTR apartments due for completion in 2025.

Hotel Fixed Income (Prime London)

4.00-4.25% 4.00-4.25% Outward

Hotel Fixed Income (Prime Regional)

4.75-5.00% 4.50-4.75% Outward

Hotel Trading (Prime London)

4.75-5.00% 4.50-4.75% Outward

BTR: Bow Square, Southampton

Hotel Trading (Prime Regional)

7.50-7.75% 7.00-7.25% Outward

Lot Size: c.£60m

Source: Cushman & Wakefield

Yield: 4.50%

Quarterly investment volume (£m)

Status: Exchanged

Comments: Patrizia has exchanged on this operational block of 102 apartments. Hotels: The Dilly

£8,000

£6,000

Lot Size: £90m

£4,000

Status: Sold

Comments: Archer Hotel Capital has completed the sale to Fattal Group, owner of Leonardo Hotels UK & Ireland. C&W advised on the sale.

£2,000

£0

2010

2015

2020

Source: Real Capital Analytics

Source: Cushman & Wakefield

10/02/2022

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Jason Winfield

Daryl Perry

International Partner

Partner

Head of UK&I Capital Markets

Head of UK Research and Insight

jason.winfield@cushwake.com

daryl.perry@cushwake.com

Martin Lay

Edward Cornwell

Andrew Smith

International Partner

International Partner

International Partner

Central London

Logistics

Student Accommodation

edward.cornwell@cushwake.com

andrew.t.smith@cushwake.com

martin.lay@cushwake.com

Richard Womack

Marcus Wood

Mark Clegg

International Partner

International Partner

International Partner

Central London

Retail

Residential

richard.womack@cushwake.com

marcus.wood@cushwake.com

mark.a.clegg@cushwake.com

Jeremy Beckett

Jonathan Hubbard

James Hanson

International Partner

International Partner

Partner

National Offices

Hospitality

Healthcare

jeremy.beckett@cushwake.com

jonathan.hubbard@cushwake.com

james.hanson@cushwake.com

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© Copyright Cushman & Wakefield 2023. All Rights Reserved. This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, Cushman & Wakefield can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to Cushman & Wakefield.

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