Peripheral London real estate markets deliver strongest returns for investors
A report studying the performance of commercial property across different areas of London has shown the value of fringe markets in the capital outperforming many conventional locations for investment.
This performance is often off the back of London’s growing technology boom.
Traditional investors, such as pension funds and high net worth buyers from the Middle East and Asia, may favour assets in the City and West End due to their trophy status, but, an emerging trend has seen peripheral locations across London gain serious momentum.
The Northern Fringe (Shoreditch and Spitalfields) delivered the highest returns in the capital last year, at 23.0 per cent, with other peripheral markets like Camden (Kings Cross) and Paddington delivering 18.5 per cent and 18.3 per cent respectively – well above the London average of 14.2 per cent.
The London Markets Report, published by IPD and Levy LLP, is the first major study into the performance of 20 of London’s micro markets – measuring over GBP42bn in assets across the capital. It shows some West End real estate also delivered extremely high returns, particular the NoHo district north of Oxford Street, which returned 19.2 per cent, with Mayfair close behind at 18.5 per cent. Despite major development activity, performance fell to 11.3 per cent in Victoria.
However, returns for the City, one of the largest London markets, were just 12.1 per cent.
Though returns in London have led the UK for the last six years, significant divisions are emerging across the different districts, resulting from changes in demand from tenants.
Facebook taking space at Euston and Google at Kings Cross are the most high profile names in a shift towards technology, telecommunications and media tenants – with these firms taking space acting as key levers for investor interest in new districts.
Traditional areas are often seeing property performance buoyed by the sheer volume of international investment. With London continuing to benefit from its so-called safe haven status, some yield driven markets see the strength of capital pushing up returns and values, regardless of asset performance.
Phil Tily, IPD executive director & head of UK and Ireland, says: “London is the single largest real estate investment location in the world, but it is all too easy to forget the massive difference in performance from one district to the other.
“Although high levels of interest from cash-rich investors has edged out traditional funds, who are more focused on strong income returns, many locations still benefit from strong tenant demand – after all London remains the power house of the UK economy, and as such there are new areas of demand emerging across the city.”
Simon Heilpern of Levy LLP says: “London is undergoing a renaissance with the impact of transport, particularly Crossrail being at the core of current development activity. As travel times diminish London is expanding rapidly into peripheral areas that are illustrating the strongest total returns from their modest traditional base values.
“In depth knowledge of the 'micro' markets is essential to identify the locations that are most likely to provide optimal investment performance.”
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