UK investors have been tempted back to the London office investment market in 2018 during a relatively stable year for commercial property, despite Brexit uncertainty.
Overall, office investment volumes reached £19.7bn last year, 1% below the level recorded in 2017 (£19.9bn) but in excess of 2016 (£16.1bn). Despite this, last year’s figure is still far below the £23bn-plus pre-EU referendum level of 2015, according to data from Cushman & Wakefield.
Domestic UK buyers represented 24% of the market in 2018, compared to 18% in 2017. High-profile domestic deals in 2018 included Landsec’s acquisition of 25 Lavington Street, SE1, for £87.1m from Gaterule. The developer had previously outlined plans to expand its 2m sq ft development pipeline and take advantage of any weakness in the market caused by Brexit.
However, the 24% figure remains below pre-EU referendum levels, with UK investors accounting for 29% of deals in 2015 and 30% in 2014.
Moreover, a disorderly exit from the European Union this year could cause domestic and international investors to procrastinate, according to Cushman & Wakefield’s head of UK offices insight Patrick Scanlon. “In 2019, we might expect to see companies pause for breath as the odds of a no-deal Brexit shorten, but the long-term outlook remains positive,” he said.
Last year, ongoing demand from investors for central London offices helped keep the prime yield in the City stable at 4%, although in the West End core the prime yield softened by 25 basis points to 3.75%.
Investors from the Far East dominated the market again in 2018, accounting for 39% of all turnover, including the top three largest deals, which were the acquisition of Goldman Sachs’ new London headquarters in Midtown by South Korea’s NPS for £1.2bn; the purchase of Swiss bank UBS’s HQby CK Asset Holdings from British Land for £1bn and Singaporean company Ho Bee Land’s £650m purchase of Ropemaker Place, EC2.
“We are seeing a broad and deep cross section of investors, including a weight of capital from Singapore, South Korea and Hong Kong, actively target London as they strongly believe in the positive long-term outlook for the city. A strong occupational market has helped to drive investors up the risk curve and diversify beyond prime stock into new locations and developments, which further demonstrates the continued strong appetite for London investment stock,” said Martin Lay, co-head of London capital markets at Cushman & Wakefield.
In the leasing market, occupiers acquired 12.2m sq ft of space during the year. This was 4% higher than 2017, when 11.7m sq ft was leased, and 21% above the total take-up in 2016.
Around 3.5m sq ft of office space is currently under offer, indicating a potentially strong start for 2019.
Take-up in 2018 was for the third consecutive year dominated by the technology and media sector, which accounted for 27% of take-up across London and two of the year’s three largest deals – Facebook at Kings Cross, N1, and China’s new home for its embassy at Royal Mint Court, EC3 – while take-up by banking and financial companies accounted for 16% of all lettings at almost 2m sq ft and flexible workspace providers accounted for 14% of total take-up.
Toby Ogden, head of London markets at Cushman & Wakefield, said: “Brexit headwinds have done little to dampen the appeal of London as a great place to live, work and play. Its strong underlying fundamentals, such as the wealth of talent, convenient time zone to access both US and Asian markets and its blooming tech market are showing no signs of diminishing.
“I am confident that London will retain its position as one of the best cities in the world in which to conduct business and invest, well beyond 29 March 2019; with almost 10m sq ft of pre-committed office space in the market, including Google, Apple, Facebook, Sumitomo Mitsui, Sony and Nike, it would seem that some of the world’s most influential occupiers agree.”