Central London real estate investment volumes decline further
29 Sep, 2008, London
The ramifications of the credit crunch continue to depress the Central London commercial property investment markets. A total of £1.244 billion of transactions took place during the 3rd quarter. This was 40% down on Q2 and represented approximately 20% of the total turnover of Q3 2007, according to the latest Central London investment market figures from global property consultant Cushman & Wakefield.
Of this turnover approximately 80% of the market was attributed to overseas investors and of this some 40% of the total turnover for the quarter was represented by German fund transactions.
Traditionally the third quarter is influenced by the summer break but with deal volumes at such a relatively low level, the summer months have arguably had a lesser impact on the market in 2008.
A total of £690 million of transactions have completed in the third quarter which compares with £928 million in the proceeding quarter and £1.75 billion for the same quarter in 2007, a reduction of almost 60%. The most significant factor is that the market has been dominated by overseas purchasers (principally from Germany and the Middle East) who have accounted for over 80% of the total transactions. 50 Stratton Street has been purchased by Middle Eastern investors and 180 Great Portland Street by the German Fund, Commerz.
Clive Bull, partner - Central London investment at Cushman & Wakefield said; “Sentiment is one of understandable caution particularly in the light of the most recent financial turmoil but there is both transactional activity and a significant amount of international equity ready to move into market, as and when conditions stabilise.”
City of London & Docklands
The City market remained fragile during the quarter with transactions down 50% on Q2 and is approximately 10% of the Q3 turnover achieved in 2007. A total of 16 deals were completed totalling around £550 million.
Five-year SWAP rates settled back to approximately 5.75% during this quarter having been over 6%. However the ability for investors to raise finance at commercially acceptable levels, or in some cases not at all, has effectively stalled a large section of the investing market. The transactions achieved during this quarter have again been dominated by 100% equity investors and almost entirely led by German open-ended funds.
German open-ended funds have accounted for in excess of £335 million in three purchases. The German open-ended fund DEKA is expected to complete on the transaction of Moor House, London Wall, EC2, for £230 million at a yield of 6.4% before the end of this month. Commerz Real paid in excess of £90 million for Athene Place, Shoe Lane, EC4, at a yield of just under 5.8%.
Prime yields at the beginning of the quarter maintained a range of approximately 5.75% - 6% as demonstrated by German acquisitions above and the acquisition of 95 Queen Victoria Street, EC4 by AT & T, for a long leasehold property at a yield of approximately 5.9%. However, towards the end of the quarter a number of prime buildings failed to sell at yields under 6% and therefore there is a view that prime yields have now drifted out to at best 6%.
Bill Tyser, partner - City investment at Cushman & Wakefield said: “There has almost been a complete lack of transactional activity in the secondary market especially for buildings with short-term income stream and those which require considerable capital expenditure on lease expiries. The price correction on these properties continues but generally there remains a stand-off between vendor and purchaser in terms of “bid-offer” spreads.”
Tyser continued: “The outlook remains one of further correction especially in the secondary market. Recent market events on Wall Street and in the City of London are likely to further exacerbate the current concern over supply and demand of office accommodation and the potential impact on rental levels as well as making the ability to raise finance for investors both extremely difficult and expensive.”
The outlook for Q4 is expected to be similar to Q3 in terms of turnover, although there is a possibility of a higher level of turnover if pricing continues correct and fundamental property values begin to emerge for some properties.
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Cushman & Wakefield
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Notes to Editors:
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