London is set for an increase in commercial real estate investment this year as international investors target the British capital’s high-yielding office market, following Brexit.
According to the latest research from Knight Frank, the global property adviser, international investors have increased the total capital targeting London commercial assets to £48.4billion (R938bn), a 21% rise on last year and £2bn higher than 2018. However, with just £2.3bn of buildings for sale, investors will face strong competition, which is expected to drive values higher this year.
Knight Frank’s annual London Report details the opportunities and challenges facing the city’s property market. It shows last year, London investment activity fell 15% to £13.9bn, down from £16.8bn in 2018, as Brexit uncertainty and a shortage of availability constrained the number of deals.
Despite the fall in activity, Nick Braybrook, head of London Capital Markets, says London remained the second largest market for commercial office real estate investment last year, topped only by Paris and ahead of New York, Hong Kong and Berlin.
“London’s stability and global status is attracting international investors who see a competitive economy, strong occupier market and high office yields, compared with other global cities. We expect the sheer weight of international demand for London assets to push prices on, and we have already seen an increase in transactions as activity ramps up following the 2019 general election result.
“International investors are attracted to London as a safe haven, offering political stability and positive growth prospects, as well as an attractive exchange rate and high yields. Office yields are among the best in the world and certainly the most favourable when compared to key European centres. In the City of London average yields are currently 4%, while in London’s West End they stand at 3.5%. Comparable yields in leading European cities, such as Paris, Frankfurt and Amsterdam, are 3%. And despite the prospect of London yield compression this year, office yields still outweigh most global bond offerings.”
One of London’s strengths is its vibrant labour market, which is reflected in resilient leasing activity, says Faisal Durrani, head of London Commercial Research.
“New office development has not been able to keep pace with this demand and almost half the space currently under construction is already spoken for.
“This supply crunch is most significant for those businesses seeking large amounts of space. We are tracking 30 businesses seeking more than 100000ft² (9290.3m²), yet there are currently just 16 buildings in London that can service these requirements.
“This supply shortage is helping to underpin our rental growth projections over the next five years. These show that headline office rents will rise by 15.7% in core West End locations, such as Mayfair and St James’s, by the end of 2024. Elsewhere, we forecast rents in the core City of London to grow by 20% in the next five years.”