_Central London investment: Far Eastern interest drives turnover
The Central London office market has proved remarkably resilient in the aftermath of the referendum vote. After initial declines during Q2 and Q3 2016, both occupier and investment demand have returned to either average or above average levels by Q1 2017.
Investment turnover in Q1 2017 reached £4.7bn, 13% above the previous quarter and 41% above the long-term average. There were 53 transactions during the quarter with an average lot size of £89m. This compares to a long-term average of 62 transactions per quarter and an average lot size of £54m.
Overseas purchasers accounted for 78% of total transactions during the quarter by value. The Central London market has benefited from strong overseas investment, in part resulting from fall in value of the pound since the vote to leave the EU. In particular, there has been strong interest from investors from Asia-Pacific.
In Q1 Far Eastern investors transacted £2.6bn of assets in Central London, which included the largest transaction of the quarter; CC Land’s purchase of The Leadenhall Building, EC3 for £1.15bn.
Central London Investment Turnover by Nationality (Q1 2017)
Source: Knight Frank Research
Investment Pricing and Outlook
West End prime yields remained at 3.50% for the ninth consecutive quarter. The continued strong levels of equity targeting West End assets, means that we expect yields for prime stock to hold at this level. The prime City yield remained unchanged at 4.25%.
Yields have proved remarkably steady for Central London offices – with West End prime yields unchanged on pre-referendum, and City yields up just 25 bps – this is because the exchange rate effect has carried the burden of the price correction.
Interest in development sites has fallen off since the referendum, however, as concerns over the occupier market dissipate, in the medium to long-term we believe buyer interest will shift from prime to value-add. This could cause prime yields to drift upwards in the next two to three years, particularly if interest rates start to rise.
Read more in the latest Central London Quarterly Report Q1 2017