Investment into London’s West End office market rose to GBP5.1bn in the year to June 2013 – a 68 per cent increase on the previous corresponding period – according to new research.
The second London West End Office Investment Report by IPD and specialist central London property consultancy H2SO shows that the sector continues to attract exceptional levels of investment.
In the 12 months to the end of June 2013, the West End office market delivered a year-on-year return of 10.6 per cent. International buyers continued their concerted buying of prime London office stock, and accounted for 67 per cent of total investment.
Comparatively, bonds returned -2.2 per cent y/y and equities 15.7 per cent y/y over the same 12 months to June 2013 (MSCI UK, JP Morgan 7-10 yr).
The research analyses the performance of more than GBP10bn of assets and confirms the stabilisation of the West End market after the turmoil of the last five years. Mayfair & St. James’s remained the leading UK office investment location with a return of 11.2 per cent y/y. The value of prime West End office buildings is now only 10 per cent off its previous peak recorded in Q4 2007.
Rental growth is helping drive the returns from West End offices as the continued lack of supply helps drive up rents. During the research period, West End rents grew by 4.7 per cent y/y. In the core sub-markets of Mayfair and St James’s, rental levels have grown significantly. The return of boutique financial organisations and emergence of natural resource companies in the core has resulted in a considerable rise in letting activity with prime rents rising to GBP120 per sq ft.
UK investors remain the most active sellers in the West End. They disposed of GBP2.92bn of assets during the research period – a 28 per cent like-for-like increase. In comparison, UK buyers accounted for GBP1.72bn of acquisitions during the research period. This was 51 per cent up on the corresponding like-for-like expenditure, but still reflected net domestic disinvestment from the West End office investment market of around GBP1.2bn.
During the research period, overseas investors accounted for 67 per cent of assets bought (2011-12: 62 per cent), but were also sellers in 43 per cent – or GBP2.19bn – of West End disposals. The increasing presence of non-UK sellers would indicate profit-taking from purchases which were made two to three years ago – prior to the yield compression and rental growth which has driven value growth since.
The report also highlights the diverse sources of international capital now flowing into London. Italian investors accounted for nearly a third of the GBP800m spent by non-UK European buyers during the research period, while Malaysian and Azerbaijani investors were the biggest spenders from Asia, respectively accounting for 23 per cent and 17 per cent of GBP1bn+ of investment. In total, more than 20 nationalities were represented amongst buyers during the research period.
Colm Lauder, associate and consultant for UK & Ireland, IPD, says: “The global perception of the West End as a capital safe haven has not diminished for the last 12 months. A continuing flux in international bond and equity markets means investors are still attracted to the West End office market from an income and capital preservation standpoint.
"Though some investors are showing a growing willingness to move up the risk curve, and UK sellers are taking advantage of high prices to look for more active management opportunities elsewhere, offices in the West End continue to attract buyers looking for stability.
"Occupier demand, which is continuing to push up rents as supply squeezes emerge, will present new opportunities for investors chasing stronger income returns and potential rental growth, rather than simply stable yields.”
H2SO investment partner Rob Hayes says: “There is now an even greater diversity of overseas players active in the West End market, with increasing activity by investors from Continental Europe and the Far East.
“UK investors very much remain the most active sellers. However, we are now seeing an increasing number of overseas investors selling the assets they bought two to three years ago and taking the profits. They accounted for more than GBP2bn of West End disposals during the research period. This is nearly double the like-for-like proportion and dispels the myth that all overseas investors are long-term holders of assets.
“With this recycling of stock and strong continued investor interest in the West End, the outlook for 2013 onwards appears positive. There is already more than GBP1.4bn of contractually committed transactions in hand.”