Promising outlook for the London office market: KF

Largest deal: 1&2 Ludgate bought by Singaporean Sun Venture.

The year ahead looks promising for the London office market, despite the ongoing Covid-19 pandemic. Investors, especially Asian capital, are looking for long-term investments and have welcomed the end of Brexit uncertainty.

The mass vaccination programme, the EU trade deal and London’s higher yields when compared to other European gateway cities, all bode well for 2021, said Knight Frank in a new report.

“The momentum is expected to continue into 2021, with the London office market now having 58% more stock available than at the beginning of last year and greater clarity following the EU trade deal,” the report states. “Opportunistic investors will target assets in the City and West End given that London’s office yields outstrip most major European gateway cities.”

Strong end to 2020 saw transactions total of £4.9 bn in Q4

The London office market saw a very strong end to 2020, with £4.9 billion of transactions in Q4, more than in the first three quarters put together and well above the £3.4 billion quarterly average, according to new KF data.

In total, 2020 saw deals worth £9.4 billion, down on the annual average of £12.5 billion but well ahead of the levels seen after the GFC, as KF pointed out.

The year ended on a high, with £2 billion of transactions in December alone. This rebound was due to investors’ eagerness to deploy the dry powder they had amassed during the quiet lockdown months and seeking assets with long-term income characteristics.

“Last year’s activity leaves much less stock now available”

Nick Braybrook

“Once again, London has demonstrated amazing resilience and liquidity in the face of adversity,” said Nick Braybrook, head of London capital markets at KF. “Despite all the challenges of the year, we recorded close to £5 billion of office investment deals in the final quarter – well in excess of the quarterly average and almost three times the previous two quarters.”

Even though London’s third lockdown may dampen some of the momentum, “there are many investors keen to buy into the inevitable recovery early, and last year’s activity leaves much less stock now available,” he said.

KF said that the heightened demand for London assets has prompted yields to tighten in the City by 25 basis points to 4%, while the West End and Docklands remain stable at 3.5% and 4.75% respectively.

Asian investors expected to invest more this year

There is an expectation that Asian investors, keen to diversify and typically drawn to trophy assets in key locations, will invest more in London this year, making the most of higher yields and diminished competition from European buyers post-Brexit.

The largest commercial property deal in the UK last year occurred in December: the £552 million acquisition of 1&2 Ludgate, an office complex in the City, by Singaporean asset manager Sun Venture.

Ricky Au, the chairman of Sun Venture, said the company decided to enter the market because it saw “a window of opportunity” with less competition for assets because of the pandemic.