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Rock, Meet Hard Place: Birmingham's Capital Markets Dilemma

Mailbox after dark

Brexit, and the general election that almost certainly won't resolve Brexit, are having peculiar effects on the property capital markets. But in Birmingham, the Brexit effect is colliding with a more local phenomenon.

In short, vendors prefer not to sell and buyers cannot buy, in a market that is (temporarily) trapped between a rock and a hard place with properties worth as much as £500M in limbo.

Latest data from Knight Frank shows a sharp drop-off in average deal size as UK institutional buyers sit on their hands, vendors wait for the mood to lift before selling, and overseas buyers wait for new stock to reach the market thanks to the surge in Birmingham office development.

Deals in Q3 include Bank House, which was purchased by Longmead Capital for
£19.1M, reflecting a net initial yield of 5.97%; whilst 120 Edmund St. sold to Credit Suisse for £52M, reflecting a net initial yield of 5.75%. Topland Group completed the purchase of 60 Church St. from Catalyst Capital for £16.8, reflecting a net initial yield of 6.81%.

Looming behind these transactions Brockton's The Mailbox is under offer to M7 at circa £190M.

Average lot sizes are down from around £100M to closer to £60M, Knight Frank said.

Domestic vendors are waiting for the market to pick up, whilst international buyers are looking for new stock with longer leases and assured core income of a kind Birmingham does not yet have.

"Weighted average lease terms on many good Birmingham office buildings are four, five or six years, so they tend to sell to domestic buyers who see the refurbishment potential, but overseas buyers need core income, eight-plus years unexpired leases on perhaps 50% of the building, and until new development comes through, that is something Birmingham cannot easily supply," Knight Frank Birmingham Head of Capital Markets Ashley Hudson said.

But don't worry. The story will have a happy ending.

Although many vendors and buyers are sitting on their hands, others are already beginning to move. "We know of £100M of assets under offer or close to agreement, so we are encouraged that domestic demand is picking up," Hudson said. "But we are not yet at the point where Brexit and political uncertainties resolve in the UK, and that is when the UK institutions will begin to up their lot sizes, a moment that will also coincide with new stock coming onto the market for overseas buyers."