JLL says domestic investors are becoming more dominant and creative in London’s office markets as political uncertainty and a lack of big-ticket opportunities weigh on international investment. The absence of foreign demand has opened the door for UK investors, which emerged as the largest single source of capital over the same period, according to JLL.
UK investors are operating in “a less crowded market for the first time this cycle,” and are happy to do deals around assets international peers can deem too small, says Julian Sandbach, head of central London Capital Markets at JLL.
“Being domestic means being in a good historical position to ride out the current uncertainty and take a longer-term view. Certainly, among those at the top of REIT management, for example, there’s a seniority that calms matters.”
With prime yields sitting at around the 3.5 percent and 4 percent levels in the West End and City, respectively, investor activity has been increasingly focused on assets with expiring leases, presenting investors with an opportunity to refurbish existing properties, he says.
In the City of London, refurbishments account for a rising share of development activity and represented half of development-starts in the second quarter. Their average share in development activity over the past 18 months is 47 percent, almost double the average between 2013 and 2017.
“There’s serious competition among domestic investors for development and refurbishment openings across both small and large lot sizes. But equally, it’s something investors are looking to do to their own assets as a way to improve value.
“Refurbishment is a strategy that UK REITs such as Derwent London and Great Portland Estates are particularly skilled at. REITs have proved to be successful, but they’re also being joined by a raft of other domestic development managers, backed by private funds and private wealth.”
Deals such as Orion Capital’s recent £209.6 million purchase of a London office, owned and occupied by British Telecom with around 30 months remaining on the lease, could be a sign of things to come in a market where vacancy is as low as 0.5 percent for new buildings.
London’s low office vacancy – itself partly due to a slowdown in development of new schemes since the UK’s referendum vote in 2016 – is making investors think “more creatively,” says Sandbach. The volume of office space let in the first half of this year was only 7 percent below the city’s 10-year H1 average. More deals which exploit the opportunity for refurbishment and the prospect of a consequent rental lift are likely, JLL says.
“The referendum certainly slowed down development plans and now we’re beginning to see the impact that is having on supply across the city. International investors are holding off; the uncertainty hasn’t helped,” Sandbach added.