London Calling!

London’s offices market in 2018 was a year characterised by resilience. Rumours of a mass business exodus were shrugged off as global corporations including Facebook, Sidley Austin, EBRD and BlackRock all made a pledge to remain in the UK, joining earlier announcements from Deutsche Bank, amongst others, in 2017. As global occupiers committed to London in the face of Brexit, so too did global investors, with buyers from an ever greater geographic spread transacting. By the end of December, close to £20 billion had been transacted in the market for the second consecutive year. In fact, our research shows, 2017 and 2018 combined is the best two year period in terms of office leasing in London (25.3 million sq ft of take-up) and the third best for investment (£39.4 billion) ever recorded, suggesting London continues to be perceived as a good buy by many. 

As Asian investors continue to be the dominant buyer group in London, we saw the return of South Korean investors in 2018 who had previously focused on continental Europe in recent years. Savills advised on the sale of 200 Aldersgate, EC1 to Samsung SRA’s for £315 million in January, that arguably triggered a wave of South Korean investment into London, with more than £3 billion of transactions by South Korean parties completing by year end. These investors are transacting in London because of the comparative value it offers, with prime yields in the City (4.0%) and West End (3.25%) considerably softer than other European tier one cities (Berlin 2.9%, Munich 2.9%, Frankfurt 3.0%, Hamburg 3.0% and Paris 3.0%). 

The rise of South Korean investors has appeared to challenge the dominant lead held by Hong Kong parties in London in 2016/17, however demand from the latter remains, and the right assets will continue to attract the top prices that Hong Kong buyers, predominantly, are willing to spend as they look to diversify capital by both geography and asset class. This was demonstrated in June last year by CK Asset Holdings who paid £1 billion for UBS’s headquarters at 5 Broadgate, EC2. 

2018 was also characterised by the return of UK buyers to the London market who, since the EU Referendum, aside from disposals, had been conspicuous by their absence. As net sellers, UK funds had grown to have large weightings of cash in need of reinvesting and London, with greater liquidity and returns than any other city in the UK, made an attractive option. We also saw deals such as the sale of the Financial Times headquarters at One Southwark Bridge to M&G for £115 million demonstrate the appetite for London’s development risk. With a number of development sites and refurbishment opportunities currently being marketed and generating strong interest, this is an area of the London market to watch in 2019. 

Turnover has been significantly down in the first few months of 2019 and although the first quarter tends to be quieter, the impact of Brexit is also a factor playing into the market at the moment. The Korean investors have been conspicuous by their absence so far but this may be as much to do with selling down the equity in those transactions bought in 2018 than a sudden collapse in confidence due to Brexit. Those deals that are offered to the market still seem to draw in a healthy level of prospective buyers particularly in the development, opportunistic and core plus space. There has been an element of repricing in core assets recently, but marginally so, and where properties have struggled to sell it is more to do with over ambitious pricing expectations from the outset than a lack of interest from buyers. We continue to receive regular fresh enquiries through our overseas offices and assuming we have an acceptable solution to Brexit by the end of March then we expect investors to return with greater desire to transact in the second half of the year. 

London's long term position as a global safe haven is unlikely to change because of Brexit. Investors invest in London, not just for its position in Europe, but for the property market’s liquidity, transparency and relatively low transactional costs packaged around long leases relative to other Tier One cities and a landlord friendly lease structure. The supply of a talented workforce is why companies continue to build their businesses in London. The capital remains one of the most desirable cities in the world where many want to work, and with its plethora of some of the best office buildings around the globe London’s commercial property continues to look good value compared to continental Europe.

“Brexit has not fundamentally altered the reasons why people want to live and invest in London. Office take up since the EU referendum suggests the city remains an attractive place to do business. We expect the UK capital to remain an attractive place to live, work and own residential assets, supporting a 12.4% price growth in prime central London by the end of 2023. Despite successive stamp duty increases, London remains mid table compared to other leading world cities in terms of buying and selling costs and the proposed additional surcharge will not substantially change that. There will obviously be competition from increasing returns from other asset classes, but the rationale is only part of the story. Those buying in central London are often less concerned about rental yield and total return, but driven by the appeal of owning a piece of prime real estate in what is widely seen as a great city to live.”

Dominic Grace, Head of Savills London Residential Development

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