Foreign Capital Pours into London's Commercial Property Market

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According to Cushman & Wakefield, investment in central London's commercial property market reached £20.5 billion ($31 billion USD) in 2014, marginally below the last investment peak in 2007 when £20.6 billion ($31.1 billion USD) was traded.

The huge weight of money flowing into the London real estate investment market from the UK and abroad looks set to continue in 2015 with the level of demand far outstripping the available supply; this will put further pressure on yields.

• City of London & Docklands completed transactions amounted to £5.0 billion ($7.5 billion USD) in Q4 2014 and £13.8 billion ($20.8 billion USD) for 2014 as a whole.

• West End transactions amounted to £2.4 billion ($3.6 billion USD) in Q4, while overall transaction volumes for 2014 hit £6.7 billion.

• Overseas investment continues to dominate the City of London & Docklands market, standing at 78% for both Q4 and 2014 overall.  In the West End, foreign investment totalled 61% in Q4 and 55% for 2014 in its entirety.

CITY OF LONDON & DOCKLANDS

Investment volumes in the City of London & Docklands reached just over £5.0 billion ($7.5 billion USD) in Q4 2014 - this is the highest quarterly volume ever recorded in the market.  The strong end to the year meant that the annual total reached £13.8 billion ($20.8 billion USD), which is the second highest on record behind the 2007 peak of £13.9 billion ($20.9 billion USD).  Half of all investment volumes in the final quarter were as a result of three transactions in excess of £250 million each, which reflects the annual trend: 48% of all 2014 investment volumes were due to 10 transactions above this threshold.

Increasing numbers of investors and surging volumes of equity are being invested into the City of London market with interest from a wide cross-section of investors, notably the world's largest sovereign wealth funds.  Overseas investors remain the most active in terms of transactional investment volumes accounting for 78% of both the Q4 and annual total.  Asian investors dominated Q4 investment volumes but over the year North American investors have spent the most money in London.  However, 2014 witnessed positive net investment from both Asia and the Middle East, while all other regions including the UK disinvested from the capital.

Due to exceptional demand, the market yields are being driven down for all investments with prime at 4.25-4.50%, albeit several transactions have completed below 4.00%, notably the Gherkin.

James Crawford head of Cushman & Wakefield's City of London investment team said, "We saw a strong City of London investment market in 2014 with international investors dominating acquisitions.  The international appeal of London continues with an ever-increasing spread of new global investors entering the market - and there are no signs of an imminent slowdown.

"Deals from £1 million to £1.2 billion closed during 2014 and capital values hit an all-time high of over £1,400 per square foot at the Gherkin.

"The first half of 2015 shows all the early signs of a continuation of last year but we expect some profit taking to occur later in the year and uncertainty around the general election in May.

"We estimate there is £250 billion of liquidity in the market available for direct investment in property - when this is combined with an improving debt market, a severe supply-demand mismatch will be created."

See below for the top five completed deals of 2014 in the City of London & Docklands; these accounted for 32.6% of total investment:




WEST END

The momentum recorded in Q3 in London's West End continued into the final quarter of last year when £2.4 billion was traded - this was the highest quarterly volume for the market last year and 10% ahead of Q3 volumes.

This brings total investment volumes for 2014 to £6.7 billion but, while above the 10-year average, the annual total lags the volumes recorded in both 2012 and 2013.

Overseas money continued to dominate the market and was responsible for 61% of volumes in Q4 and 55% of the annual total.  Over the year, North Americans were most active (19%) followed by European investors (14%).  UK investors disinvested from the West End over the course of 2014, but investors from all other regions were net investors. 

Overseas private money has continued to dominate money into the West End, accounting for 27% of annual investment volumes - although this is below the high point of 34% seen in 2013 as competition with other investor types intensified.  Funds, both UK and overseas, accounted for a higher proportion of investment volumes year-on-year, as they raised their allocation to property, while UK property companies have spent proportionately less money in the capital.

Prime yields remained stable across the West End at 3.25%.

Cushman & Wakefield's West End investment team partner Andrew Thomas said, In 2014 we saw the return of the UK funds as major investors in the West End.  The consequence of yield compression outside of London resulted in investors needing to focus on growth markets for returns, hence the surge of capital in the latter half of last year.  As the prognosis for growth appears strong for the West End market, the outlook for 2015 looks positive - particularly for assets which allow for such growth to be captured early."