JLL: central London H1 investment volumes tumble 39% but leasing remains resilient

Investment in central London offices has fallen an estimated 39% in H1 to £5 billion, compared to the same period last year, according to preliminary JLL data, while leasing remains resilient, at 4.3 million sq ft.

Political uncertainty is continuing to impact investor confidence, which is most acutely felt by institutional investors who are particularly cautious due to uncertainty and understandably, risk, according to JLL’s head of central London capital markets, Julian Sandbach.

The latest research from JLL has indicated that UK investors are largest source of capital in the central London market, accounting for around one-third of all transactions. In the occupational market, the volume of central London office space let in H1 is forecast to reach 4.3m sq ft, only 6% below the 10-year average.

In the first six months of 2019, a number of global operators from all sectors such as Facebook, Glencore, Milbank Tweed, Sony Music, ERBD, Brewin Dolphin and G Research all committed to significant amounts of office space in the capital as they continue to compete for the best quality buildings.

Dan Burn, head of City agency at JLL, explains:

“London has a dwindling supply pipeline and although many cranes can be seen across its skyline a number of these developments have been pre-leased, with broadly 48% of the buildings under construction already let to future occupiers. The squeeze is more acutely felt with 2019 product where 59% of speculative construction is now leased.

“In addition, as occupiers vie for the best space, there is a significant amount of space currently under offer, totalling 3.8m sq ft which we anticipate will push leasing totals for the year towards 10m sq ft, in line with 2018. Looking ahead, the low levels of speculative pipeline combined with the sustained occupier demand, will continue the upward pressure on rental growth, especially as the vacancy rate on brand new buildings is 0.5%.”

“Undoubtedly the health of the leasing markets will provide an underlying level of confidence to investors, albeit much of this capital is sitting on the side-lines awaiting further clarification on Brexit outcomes. In 2018 inward investment was heavily dominated by Korean and Singaporean capital and whilst we have seen Korean investment recede from London this year, due to concerns from the securities firms to sell down their positions, we are yet to see a new international capital source emerge. Instead we have seen enhanced numbers of private individuals and family offices become more active, particularly in the West End, as a result of a reduction in levels of competition and a less crowded market and for the first time in many years UK buyers have been more active than any other group.

“Whilst investment transactional volumes are down, pricing levels have not suffered and yields have remained firm. The ever-decreasing supply pipeline coupled with strong levels of pre-leasing has led to intense competition for development and refurbishment opportunities across the capital. There is strong appetite from REITs, development managers and property companies seeking to reposition assets that will capitalise on the robust occupier demand and low future supply with pricing being driven hard by the strong competition.

“Furthermore, with London prime yields at an average of 4%, the arbitrage available over prime European cities at 3% is plain to see and for best in class assets, strong competition still exists.”

james.wallace@realassetmedia.com