Overseas Investors Continue To Favour London’s Commercial Property Market

5 Oct, 2009, London

Investment activity in London’s commercial property market has risen again for a second consecutive quarter according to new figures from Cushman & Wakefield. Its figures for Q3 2009 show that £1.602 bn was invested in central London’s main West End and City & Docklands markets, an increase of over 12% on Q2’s total of £1.432 bn and a 29% rise on the same quarter last year. It is the first time the capital has delivered two quarters of consecutive growth since Q2 2007.

The dominant buyers continue to be overseas investors attracted by the weak pound and the very attractive returns achievable resulting from London’s relatively rapid price correction compared to other markets across the world.

Transaction volumes in West End up 24% on previous quarter
The West End again showed the biggest increase in activity with £909m invested; an increase of 24% on Q2’s total of £732m and up 32% on Q3 last year. There was no sign of the 'traditional' summer break with vendors keen to take advantage of the purchaser demand which has been building up throughout 2009.

In excess of 70% of all transactions were by non-UK buyers with London staying firmly on top of many international investors’ shopping lists. Reasons for this trend include the continuing weakness of the pound and the fact that the London/UK market has corrected more quickly than other global markets providing investors with relatively attractive returns.

Notable deals of the quarter include: the purchase of Portman House for £155m by the Libyan Investment Authority. Telstar House in Paddington, was purchased by Henderson from the Prudential for £74.5m and the Arup building on Fitzroy Street, acquired by the tenant for a price of £60m, an initial yield of just over 7%.

Clive Bull, head of central London investment, at Cushman & Wakefield said: "It is not surprising that yields remain under pressure particularly with a relative lack of supply to satisfy investor demand. Most of the UK institutions and REITs seem to have reached the end of their immediate selling requirements and there is limited evidence of the banks releasing the much heralded stream of 'distressed assets'. The remainder of 2009 is likely to see a similar theme with yields coming under more pressure. Whilst there undoubtedly remain difficulties in both the economy and the occupational leasing markets, investors are looking beyond the immediate problems and trying to position themselves in the market to reap benefit from the anticipated recovery."

City & Docklands investment transactions on course to reach £2.5 billion for 2009
The major highlight of the last quarter was the sale of a 50% stake in British Land’s 4.4m sq ft Broadgate estate in the City of London to Blackstone for just over a £1bn.

Excluding this major acquisition, transactions for Q3 totalled almost £700m, made up of 19 transactions of which seven transactions account for in excess of £550m. All of these transactions were acquired by overseas funds, who accounted for approximately 90% of all acquisitions for Q3.

Whilst this £700m total represents a 1% fall on Q2, the number of transactions almost doubled compared to the previous quarter and the total represents a 25% increase on the £554m recorded in the same quarter last year.

Key transactions include: the acquisition by the German fund GLL of Tishman Speyer’s refurbishment of the Centrium, 61 Aldwych, for £128m and a yield of approx. 7.2%; Crescent Height’s acquisition of 98 Theobalds Road from Land Securities a property let for a short-term to Warner Brothers for £43m and a yield of 8.5%. Another notable deal was the acquisition of 10 Gresham Street, EC2 from Standard Life of this newly developed and highly specified office building by Union Invest for approximately £141m and yield of 7.2% for a building with varying lease lengths and some rents in excess of £60 per sq.ft.

There are currently three buildings that have exchanged amounting to £105m and 10 buildings currently under offer amounting to £420m. The year is on course to achieve, excluding the Broadgate acquisition, a total volume of approximately £2.5bn. A high percentage of these acquisitions are expected to be overseas funds who continue to drive the market due to weak Sterling, low interest rates and comparatively high yield returns.

Bill Tyser, head of City investment, Cushman & Wakefield warns that; "The availability of deliverable stock remains a key issue moving forward, as the number of enquiries from international investors including new entrants from the Far East, continues to increase. In recent weeks, we have begun to see the return of some UK institutions which are underweight across Central London. This is beginning to put pressure on those properties which are riskier due to short-term income stream or where some capital expenditure is required.

However, generally these riskier investments, whilst of interest to many investors, require financing which remains limited and expensive and this lack of available finance continues to hold up the progress in this secondary market. The outlook remains very positive with an increasing number of international and UK investors coming to the market, coupled with the inflection point in the rent and rent-free period cycle potentially being turned."

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