Investors still drawn to London following weakest ever quarter

Only 10 office properties changed hands in central London in the second quarter of 2020 making it the weakest quarter on record for central London office investment. The effects of the pandemic were even worse than the Global Financial Crisis. However, there are signs of recovery, says Tom Leahy of real estate research firm RCA.

• Sun Venture of Singapore is to pay £552 million (€) for at a 4.3% yield.
• In July Sun Venture bought Commonwealth House from BA Pension Trustees and Nuveen Real Estate (UK).
• Hong Kong company Lifestyle International’s is buying BP’s office in St James’s for £250 million
• Suntec, also from Singapore, is buyin 50% of the Nova development in Victoria for £430 million.
• AGC Equity Partners is buying One London Wall Place from Brookfield for £477 million.
• Hong Kong-based Link REIT’s purchase of The Cabot in July is notable. It was the firm’s European debut and had formerly be linked with Blackstone, but the deal collapsed in March.
• The largest deal pending is Google company Alphabet’s acquisition of the Central St Giles offices for £700 million
• Even M&G’s £112 million acquisition of Fleet Place House is on behalf of an Asian investor.

Leahy said London remains the number one destination for new entrants to Europe and has accounted for close to 40% of capital spent by buyers new to the European market over the last decade. However, he points out that in the Alphabet deal on Central St Giles, the price reflects a value of £986 per square foot which he points out is below the Central London average.

“One of London’s advantages is that there is usually someone, somewhere who wants to buy real estate in the city — it is a truly global asset class and doesn’t always function in the same way as other commercial real estate markets,” says Leahy.

He points to the 2016 post-Brexit-vote “tumult” of fund redemptions which forced assets onto the market many of which were acquired by ultra high net worth individuals, mostly operating out of Hong Kong.

One longer term effect of that Brexit referendum was London’s slide from first to 16th in RCA’s rankings of the world’s most liquid commercial real estate markets.

Lack of Brexit trade deal could mean more disruption

Leahy said that with a trade deal still to be struck with the European Union there is potential for more disruption. However, he said that Covid-19 could prove to be a more severe long-term disruptor to working lives if office occupiers significantly downsize their footprints.

“In this uncertain environment, owning prime, well connected office space that can adapt to changed use patterns is desirable,” Leahy said.

Finally, he adds, London looks cheap in comparison with other major European cities when considering yield trends.