- Middle Eastern investment into central London offices busiest since pre-pandemic levels
- Strutt & Parker’s London New Homes team attributes 50% of their market this year as dollar-based; with 30% hailing from the US and 20% from the Middle East [see S&P view below commercial]
- Strutt & Parker forecasts Prime Central London house price growth of up to 10% over the next five years
London, 19th December 2023 - BNP Paribas Real Estate research has revealed that Middle Eastern investment into central London offices is the busiest it has been since pre-pandemic levels.
As of November 2023, Middle Eastern investment into central London offices stands at £621m and is already in line with the previous 5-year average from 2018 to 2022 at £618m. This period also marks the busiest for Middle Eastern office investors since 2019 when the first nine months reached £817m.
James Carrington, head of City investment at BNP Paribas Real Estate explains: “Central London commercial investments have become more attractive as Middle Eastern cost of capital is now more in sync with what the market has to offer, with sovereign wealth funds, institutions and family offices becoming more active across the risk-return spectrum spanning core, core+, and value add. There is also less competition for deals over £100m facilitating opportunities for Middle Eastern investors to provide liquidity in the market.
“Prime West End locations are the ‘hottest’ in terms of pricing, with yields remaining relatively robust and standing at 4.15%. Other submarkets of the West End such as Fitzrovia and Covent Garden, as well as core City of London locations have seen further movement on yields and are now providing some interesting opportunities. This, combined with continued strong rental growth prospects for best-in-class assets, particularly in the core West End where supply remains constrained, creates the potential to realise excellent returns over the next 5 years.”
“For those investors willing to roll their sleeves up and target core+ or asset management opportunities, particularly in improving ESG credentials, the margin for entry price and potential exit values is accentuated. To give this context, prime office rents across the West End have reached £150 per sq ft, up 7.1% year-on-year, with experts forecasting significant growth over the next year and beyond. Rents in the City remained at £72.50 per sq ft, however, premium rents achieving £90.00+ per sq ft are becoming commonplace.”
Looking ahead to commercial investing in 2024, Carrington added: “There is a window of opportunity to secure central London office and retail investments next year at opportunistic capital values which have corrected faster than almost every other European counterpart. Supply has been limited, however, as valuations become more realistic and debt providers encourage more ‘consensual’ sales, we envisage more stock will become available next year, particularly in off-market scenarios.
“In addition, commercial real estate is set to become more attractive in 2024 as pricing stabilises and other asset classes, such as Gilts and cash returns sharpen (see below UK 10-year Gilt yield forecast). The key will be to be selective, targeting assets with strong property fundamentals, including core locations and ESG credentials which either exist or have the potential to provide. These assets will not only see a stronger recovery, but also ensure the occupational demand is captured with premium rents and growth being achieved on those best-in-class assets.”
Relative residential value ripe for investors across Prime Central London
Strutt & Parker’s London New Homes team attributes 50% of their market this year as dollar-based; with 30% hailing from the US and 20% from the Middle East.
They assign the success of new build schemes this year not only on currency play, but on the high-quality product offered that more closely echoes the traditional US models with a firm focus on service offering and amenity provision.
Victoria Allner, director in the Private Client & International Department at Strutt & Parker/BNP Paribas Real Estate comments: “Prime Central London (PCL) continues to be an attractive marketplace for international buyers. While premium values have barely shifted over the past year thanks to the market’s discretionary nature, those buying with dollar-based currencies, such as the US, Middle East and Asia have been able to capitalise on a weak pound and have made their own savings. This all started at the end of September 2022 with the pound dropping to record lows coupled with anticipated increases in PCL values over the next five years. This combination fuelled international investment into London’s prime real estate, a trend which has continued over the last year dominated by cash buyers or those with access to more attractive lending.
“Those buying in cash, and maximising currency play effectively benefitted from a ‘double discount’, unencumbered by competing buyers in the market this year. Despite achieving discounts while transactions have remained at relatively low levels, values in PCL have been underpinned more broadly.
“The budget of a UHNW Middle East based buyer who I worked with earlier this year had effectively increased by 25%, while many adopted a ‘buy now and leverage later’ approach to maximise their discount window.”
Strutt & Parker forecasts Prime Central London house price growth of up to 10% over the next five years, and with current values still beneath the 2014 peak, the present market provides a ripe opportunity for investment.
