London offices exhibiting signs of a two-speed market

Central London office investment volume set to be 39% down on H1 2018, while lettings are only 6% below 10-year average 

The commercial real estate market in Central London is displaying two-speed symptoms as investment volumes for H1 2019 appear to have slumped while lettings activity has only slightly dipped.

JLL, the global property services firm, has produced data which predicts a 39% fall in overall investment to £5 bn (€5.58 bn) for the first six months against £8.1 bn was transacted in the same period of 2018. Meanwhile, 4.3 mln sq m of space is forecast to be let, which is only 6% lower than the 10-year average.

The property services firm suggested that Central London was exhibiting ‘strong resilience’. UK investors are currently the largest source of capital accounting for one third of deals.

Julian Sandbach, head of Central London Capital Markets at JLL said: ‘Political uncertainty is continuing to impact investor confidence at present, 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 half of 2019 is forecast to reach 4.3 mln sq ft, only 6% below the 10-year average.’

JLL cited that occupiers continue to show long-term confidence in Central London and recognise its place as a global business centre. In the first six months of 2019 a number of global operators from all sectors such as Facebook, Glencore, Milbank Tweed, Sony Music, ERBD, Brewin Dolphin and G Research have committed to significant amounts of office space in the capital as they continue to compete for the best quality buildings which reflect their brand and are a funnel to attract the best talent.

Dan Burn, head of City agency, added: ‘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.’

The squeeze is more acutely felt with 2019 product where 59% of speculative construction is now leased. In addition, as occupiers vie for the best space, there is a significant amount of space currently under offer, totalling 3.8m sq ft which JLL anticipates will push leasing totals for the year towards 10m sq ft, in line with 2018.

Sandbach said, 'Undoubtedly the health of the leasing markets will provide an underlying level of confidence to investors, albeit much of this capital is sitting on the side-lines awaiting further clarification on Brexit outcomes.’

In 2018, inward investment was heavily dominated by Korean and Singaporean capital and whilst JLL has seen Korean investment recede from London this year, due to concerns from the securities firms to sell down their positions, it is 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, as a result of a reduction in levels of competition and a less crowded market and for the first time in many years UK buyers have been more active than any other group,’ explained Sandbach.

He continued, ‘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 and low future supply with pricing being driven hard by the strong competition.

‘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.’


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