While international investors gather on the sidelines in what appear to be increasing numbers, UK investors have leapt to the top of the leader board for London acquisitions, committing almost £1 billion in Q3, taking the nine-month total to £2.6 billion. UK investors have capitalised on a less competitive field prior to the General Election, even though yields in the City have now recovered the 25 basis point outward movement from the start of this year, to stand at 4.25% for 10-year income. In the West End, there is a lack of transactional evidence to suggest yields have recovered so they remain at 3.75% this quarter.
Despite the compressed yield in the City, London remains more attractive than many other global gateway locations. Looking ahead to 2020, Knight Frank expect to see a marked increase in overseas investment activity, especially as the government continues to message that a conclusion to Brexit is near, which will unlock pent up demand.
Nick Braybrook, Head of London Capital Markets explained:
“Investors have been circling the market in increasing numbers over the last few months, with international capital drawn in by attractive yields and the currency discount compared to other global cities. London’s perceived risk profile has improved tremendously through the second half of 2019 whilst geopolitical tensions in markets from Asia to the Middle East have eroded their relative attractiveness boosting the appeal of London. Pricing is going to rebound strongly in 2020, as the reduced risk is combined with stock shortages and a strengthening occupier market.”
Faisal Durrani, Head of London Commercial Research added:
“The political uncertainty certainly dampened activity for most of 2019, but a shortage of assets for sale exacerbated this. With the decisive Conservative majority secured in the General Election, confidence is expected to rapidly return into the market, something investors have been hankering for. On the leasing front, businesses are continuing to expand, with the amount of office space required still outweighing the options available. And with more than half of all offices under construction already spoken for, upward rental pressure is likely to persist.”
By the end of 2023, Knight Frank forecasts a new all-time high rent in sub markets like Mayfair and St. James’s of £125 per sq ft, while many other West End locations will breach the £100 per sq ft mark for the first time.