Surge in London commercial property investment from overseas buyers

Investment in London commercial property has risen for the first time since Q2 2007 according to new figures from Cushman & Wakefield. Its statistics for Q2 2009 show that £1.433 bln. was invested in central London’s main West End and City & Docklands markets, an increase of over 110% on Q1’s figure of £679 mln.

The central London property investment market is likely to be among the first to recover in Europe and the increase in activity is further evidence that overseas investors see value with yields at an historic high. Cushman & Wakefield’s forthcoming monthly yield report will also show that weight of money is now putting some pressure on prime yields in the City of London.

The biggest increase in activity was in the West End market with £733 mln. invested; an increase of over 250% on Q1’s figure of £207 mln. It is still below Q2 2008’s total of £928 mln. The average lot size was £23.6 mln. up from £14.7 mln. in Q1. Overseas private buyers dominated with 38% of purchases with overseas funds accounting for a further 22%. Notable deals included 2-4 Triton Square, N1 which was purchased by the tenant Abbey for £115 mln. and Belvedere House at 27 Knightsbridge which attracted fierce bidding from overseas investors and was eventually sold for £59.5 mln. to a private overseas buyer.

Clive Bull, Head of central London investment and a partner in Cushman & Wakefield’s London Group said: “The most significant observation is the dominance of the overseas investor. Over 60% of West End transactions have been completed by overseas funds or private organizations. Their interest has been fuelled by a perception that the London market represents relatively good value, the continuing weakness of the pound and the lack of competition from the traditional UK/Irish debt buyers. The question exercising the minds of many investors, however, is whether this activity is the start of the recovery or some kind of false dawn. There is encouraging evidence that it is the former with a further £275 mln. of stock under offer in the West End and £167 mln. of deals which have exchanged but yet to complete.”

The single biggest transaction in central London was in the City with the purchase of an 80% stake in Hammerson’s Bishop’s Square development for £440 mln. (at a 7.3% yield) by the Oman Investment Authority. This purchase made up the bulk of the City’s Q2 total of £700 mln. although a further £616 mln. of deals are currently under offer but yet to complete. Q2’s figure was an increase of 48% on Q1’s figure of £472 mln.

Perhaps the most significant City deal which has exchanged but is yet to complete is the sale of Friary Court, 65 Crutched Friars, EC3 for around £42 mln. Throughout 2008 this building could not sell at a 7.5% yield but it has now exchanged at a 6.8% yield. Evidence that prime City of London yields are now the first to harden.

Bill Tyser, Head of City investment and a partner in Cushman & Wakefield’s London Group said: “The market continues to be fundamentally two tier with the majority of activity focused at the prime end (with inherently risk averse assets). Investment is being driven by Euro denominated funds including German, French and Italian sources. The remainder of the activity, in the more secondary end of the market continues to be frustrated by the lack of suitable finance for riskier assets. That is not to say there is no activity, however it is proving to be slow. The level of interest and activity from Europe has increased during Q2, driven by a relatively weak pound and the general perception that yields across London are now at a high coupled with historically low interest rates.”

Source: Cushman & Wakefield