Views

Leasing activity in Central London underlines investment credentials

Overall investment into Central London offices reached £7.2bn for the first three quarters of 2019, representing a 42% drop on the same period in 2018 when £12.5bn was invested

October 31, 2019

Inbound international capital between 2000 and H1 2019 (excluding domestic investors)

Political uncertainty has continued to impact investor confidence, and this is most acutely felt by institutional investors who are particularly cautious due to uncertainty and, understandably, risk. The irony of the situation is that the reverse is being seen in the occupational market where the volume of space let in the first three quarters of 2019 reached 8.1 million sq ft, which was above the long run Q1-Q3 average, and just 3% below the first nine months of 2018.

London has a dwindling supply pipeline and, although many cranes can be seen across its skyline, a number of these developments have been pre-leased with broadly 48% of the buildings under construction already let to future occupiers. As occupiers vie for the best space, under offers currently total over 4.2 million sq ft, which is the highest volume since mid-2007.

 

Undoubtedly, the health of the leasing market provides an underlying level of confidence to investors, albeit much of this capital is sitting on the sidelines awaiting further clarification on Brexit outcomes. In 2018, inward investment was heavily dominated by Korean and Singaporean capital. Whilst we have seen Korean investment recede from London this year due to concerns from the securities firms to sell down their positions, we are yet to see a new international capital source emerge. 

Instead we have seen enhanced numbers of private individuals and family offices become more active, particularly in the West End. Due to a reduction in levels of competition, and a less crowded market, for the first time in many years UK buyers have been more active than any other group, accounting for around a third of all transactions. 

Whilst investment transactional volumes are down, pricing levels have not suffered, and yields have remained firm. The ever-decreasing supply pipeline coupled with strong levels of pre-leasing has led to intense competition for development and refurbishment opportunities across the capital. There is strong appetite from REITs, development managers and property companies seeking to reposition assets that will capitalise on the robust occupier demand. Furthermore, with London prime yields at an average of 4%, the arbitrage available over prime European cities at 3% is plain to see and for best in class assets, strong competition still exists.