£45m of global equity targeting London office market
The weight of money targeting London office property is growing, according to the latest report from global real estate advisor, CBRE. CBRE estimates that between £40bn and £45bn of global equity is looking to be deployed into the London office market, the highest volume since tracking began in 2012.
The investment market has been relatively active at the start of 2021, with provisional figures indicating that Q1 2021 London office investment volumes totalled £1.3bn, compared to £1.6bn for the same period last year. The dominant buyers in Q1 were UK investors who were focused on Core+ and Value Add opportunities, demonstrating the underlying confidence in the long term-future of the London office market.
However, the majority of investment transactions that have completed in 2021 originated in the period prior to the third lockdown, which extended barriers to activity, largely due to restricted travel. As such, CBRE expects an uptick in activity once these restrictions ease and is anticipating prime yield compression in certain sectors of the market when the investment market returns. According to the latest figures from CBRE, prime yields in the West End core markets of Mayfair and St James’s compressed in the final quarter of 2020, moving from 3.75% to 3.5% and transactional evidence indicates that the City market could see similar movement.
Relative pricing of London compared with other European markets further suggests yield compression for fully let, rack-rented buildings in the best locations. In March 2021, prime yields were 2.75% and trending lower in Paris, 2.55% in Munich and 3.1% in Milan. Even accounting for the higher cost of debt in the UK, on a cash-on-cash basis, CBRE estimates that London offers investors superior returns in the range of 50-100 bps relative to other large European cities.
It is no surprise that given the constraints of the third UK lockdown, the London investment market slowed in Q1 2021. However, we are genuinely optimistic about the second half of the year given the returns London can offer together with the weight of capital looking to access the market across the risk spectrum. Latent demand for office investment stock in London is at record levels and we are expecting to see a flurry of activity when restrictions end.
Will the nascent signs of yield compression be confirmed once we have the evidence to prove it? For secure, long income, rack-rented, well-located, high-quality buildings, we think so. For international investors, there is an attractive yield gap between London and the risk-free rate and between London and other large European markets. In light of this, it is no surprise that London has retained its place as the number one destination in EMEA for cross-border investment in our latest survey of investor intentions.