Robust first quarter for London commercial property investment market

18 Apr, 2012, Frankfurt

• £3.6bn-worth of Central London commercial property transacted in Q1 2012, up 42% on the previous quarter

Despite a poor occupational market, investment in Central London commercial property remained robust in the first quarter of 2012, with £3.6bn transacted, according to Cushman & Wakefield. This represents an increase of 42% on Q4 2011 (£2.54bn).

In the City & Docklands, Q1 closed with a surprisingly high volume turnover, bearing in mind the turmoil in markets at the end of Q4 2011. Transactions for the quarter amounted to £2.4bn in 31 deals. Of this, 70% was made up of seven transactions and nearly 85% of the volume was accounted for in 13 deals. International investors continued to dominate the market, accounting for 85% of acquisitions. The vast majority (89%) of sales were made by either UK or European investors.

German funds returned to the market, accounting for £190m completed in two transactions, a further £150m exchanged in one deal and another £235m under offer. Similar to previous quarters, Middle Eastern investors were active, with the acquisition of 1 Cabot Square for circa £325m and Arundel Court for around £234m.

Key City & Docklands deals in Q1 2012 include; 1 Cabot Square, E14, acquired by QIA for £330m, representing a 5.4% yield, on a sale and leaseback from Credit Suisse: 175 Bishopsgate a building let to EBRD and 90 High Holborn let to Olswang for a combined value of £515m and a yield of 5.25%. These represent acquisitions from the Kanam Portfolio of approximately £1bn launched into the market at the end of 2011.

The supply of Grade A 10 year-income deals, which feeds the demand from international investors, looks to be drying up. As a result, yield pressure is likely. This is evidenced by PNB paying 5.25% for two investments (Midtown and City), both let for 10 years. Large properties with less than 10 years of income stream are proving to be difficult to sell, represented by the recent withdrawal from the acquisition of Woolgate Exchange by PNB.

Of the other deals that have taken place in the City & Docklands this year, a number of buildings have been acquired for conversion either to hotels or residential. One example is the acquisition by the Candy Brothers of Sugar Quay, Lower Thames Street which failed to achieve a figure in excess of £30 million throughout 2011 as an office redevelopment.

In the West End, total volume was £1.21bn made up of 40 deals, the majority of which were under offer prior to Christmas. This represents an increase of 4.83% on Q4 2011 (£1.15bn), and a rise of 105% on Q1 2011 (£592m). Overseas investors accounted for 56% by value. There was a marked increase in deals acquired by PropCos, constituting 60% by value, as opportunistic purchases. Over half the volume (£660.1m) was made up of four deals.

Key West End deals in Q1 2012 include; 1 Kingdom Street W2, acquired by Cityhold from Union/ Aviva (JV) for £230m representing a yield of 5.89%: Eland House, Bressenden Place W1 purchased by Tishman Speyer from Land Securities for £171.1m with a yield of 6.82%: and CAA House, 43-45 Kingsway WC2, acquired by Almacantar for £109m representing a yield of 5.38%.

Clive Bull, Head of Central London Investment at Cushman & Wakefield, commented, “Buyers in the West End are as varied as ever with demand remaining strong for prime but faced with a very restricted pipeline for stock. With opportunities few and far between, pricing remains robust. In the more secondary or fringe market, supply is slightly better with demand coming from the REITS, opportunity funds and PropCos buying optimistically, and also the residential developers looking at change of use plays. On the retail side, private investor demand remains robust, with high net worth individuals looking at trophy, wealth preservation assets.”

Bill Tyser, Head of City Investment at Cushman & Wakefield said, “The market is becoming increasingly starved of opportunity. With the continued weight of international investors facing the market, yields across the board are expected to be maintained for secure income stream investments. However the market for short income stream refurbishment opportunities, whilst on the face of it extremely buoyant and aggressive, remains tricky. Though many potential operators are chasing opportunities, the number with equity available and the ability to actually execute a transaction remains limited.”

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