Investors targeting London offices in 2021 with GBP46bn of capital, says Knight Frank
Investors are targeting London’s office investment market with GBP46 billion of capital in 2021, as they look beyond the Covid-19 pandemic and recognise the fundamentals of the sector and its 'safe haven' status, according to global property adviser Knight Frank’s annual London Report.
London’s reputation as a safe haven and leading global city is attractive to investors worldwide, particularly as returns are currently very attractive compared to other European and global gateway cities. Removal of the ‘no deal Brexit’ risk premium will be a further catalyst for capital markets activity.
Knight Frank has identified the top three locations with the highest amount of dry powder capital that has been ear marked for the purchase of commercial assets in London this year: Greater China (which encompasses Chinese mainland, Hong Kong SAR and Taiwan) at GBP12.6 billion, Singapore with over GBP5 billion and the US with over GBP3 billion.
Despite the pandemic leading to many companies temporarily adopting remote working, the longer-term picture is that London could face a substantial shortage of office space. Knight Frank is tracking 26.6 million square feet of pipeline office developments across London for completion over the next 15 years, but finds that only 3.2 million square feet will be delivered to the market speculatively (ie without having secured a tenant and available to let) by 2024. In contrast, the long-run annual average take-up of new and refurbished space is 5.3 million square feet. Over the longer-term, this supply and demand imbalance will begin to put greater upward pressure on rents for best-in-class space.
The Covid-19 pandemic has accelerated a focus on high-quality offices, with businesses increasingly favouring modern workplaces that prioritise amenities, wellbeing and sustainability. Knight Frank predicts that demand for prime Grade A offices will intensify, relative to poorer quality buildings, creating a greater disparity between the prime and secondary markets.
Nick Braybrook, Head of London Capital Markets at Knight Frank, says: “Overseas demand for high quality London office investments has once again proved amazingly resilient. All markets have faced extraordinary challenges, but prime London assets demonstrated their liquidity all through the pandemic. As markets recover, from both the pandemic and the Brexit uncertainty pervading since 2016, the race will be on again for this wall of capital to secure the best assets – the question now is who will be the sellers?”
Faisal Durrani, Head of London Commercial Research at Knight Frank, says: “Even in a globally stressed environment, international investors, without a doubt, remain committed to London in 2021, even if not all of their capital can, in practice, be deployed during the space of one year. And as the world’s number one city for cross border investment and the top city for cross-border private investment during 2020, the resilience of London’s appeal cannot be understated.
“The pandemic will likely go down as one of the greatest disruptors commercial property has ever seen, however we may be on the cusp of a post-pandemic road to recovery for real estate. Once you factor in a requirement for buildings to meet increasingly ambitious ESG credentials, it is clear the volume of office space available to satisfy demand for prime office space is limited. This is a key factor in our rental outlook for prime London offices where we forecast every submarket to experience upward rental growth over the next five-year period.”
In spite of the UK’s ongoing lockdown, London remains top of investor wish lists, supported by yields that remain above those of most major global cities. In addition, with the highest concentration of green buildings globally, at almost 3,000, London offers opportunities for ‘green’ investors and those looking to rebalance their carbon targets. Knight Frank expects activity to ramp up as pent-up demand combines with investors employing long-term strategies, post the Covid-19 pandemic.