The force of international investors in the Central London commercial property market was highlighted again in Q2 2012. Four-fifths (80%) of all acquisitions in the City & Docklands were accounted for by overseas investors. In the West End this figure was 57.4%.
Investment across the whole of Central London was up by over one fifth (21%) on the previous quarter – £4.36bn compared to £3.6bn transacted in Q1 2012. This represents a steep rise from Q4 2011 (£2.54bn).
In the City & Docklands, £3.6bn was transacted in 38 deals of which £2bn was accounted for in 10 deals. This was a jump of 50% on the previous quarter (£2.4bn in Q1 2012). The first half of 2012 saw just under £5.5bn-worth of transactions completed. Around 70% of this volume was accounted for in 30 transactions out of a total of 71.
Although there has been a robust demand from investors to date this year, the current generation of investment stock in the City & Docklands is now drying up. Whilst there are some new properties being offered to the market, the outlook for significant buildings being offered for sale remains limited. Despite this, Cushman & Wakefield predicts a volume turnover in the City & Docklands this year more representative of the boom years of 2006 and 2007.
There is activity amongst all risk profiles but the majority of transactions involve secure medium-term income stream properties. Significant deals in the City & Docklands during Q2 2012 include the acquisition of Plantation House by a private Brazilian investor for £470m showing a net initial yield of around 5.7%, and Brookfield’s acquisition of Hammerson’s City Portfolio for £518m, consisting principally of three large office buildings: 1 Leadenhall Court, 125 Old Broad Street and 99 Bishopsgate.
In the West End, the amount of commercial property transacted during the second quarter was £1.29bn in 36 deals. This represented a slight increase – 6.6% – on the previous quarter (£1.21bn in Q1 2012). Overseas investors accounted for 57.4% by value. The average lot size was £35.8m. Overseas buyers – funds, private investors and property companies – continue to dominate the market, as in the City and Docklands.
The volatility across Continental Europe appears to be having a positive impact on London with investors seeking to move equity into this relatively stable market. Adequate supply in the West End is largely being provided by vendors looking to cash in on premium prices which are being paid, on the basis that this trend may not last indefinitely. Any rise in interest rates could put pressure on the low yields being achieved for prime property in Central London.
Significant deals in the West End in Q2 2012 include the sales of: Queensbury House, 3-9 Old Burlington Street to an Italian investor, the Sorgente Group, for a price of £167m; Stratton House, 5 Stratton Street to a private German investor for a similar capital sum; and the acquisition of 333 Oxford Street – which includes the Zara HQ – by Inditex, the operating company of Zara. The latter is an example of a retailer buying in its own freehold as a way of ensuring future representation and protection against rising rents.
Clive Bull, Head of Central London Investment at Cushman & Wakefield, commented, “In terms of outlook, we see international demand continuing for good quality products in London with supply still coming from existing owners seeking premium prices but less supply in terms of retail investments as many owners are now long term investors.”
Bill Tyser, Head of City Investment at Cushman & Wakefield said, “With continued geo-political risk, and unresolved European debt crisis amongst a number of other difficult headwinds, the outlook for Central London activity – both in terms of potential sales and a strong demand – remain positive in the face of a relatively weak leasing market and rents effectively flat-lining.”