London office landlords shift from sell to buy
Making sense of the latest trends in property and economics from around the globe.
5 minutes to read
Higher interest rates and the prospect of costly sustainability upgrades have weighed heavily on office investment volumes this year, but is a turn in sentiment underway?
Take the City and Southbank - transaction volumes rose 78% in the third quarter to hit £0.95 billion. Prime yields remained largely stable at 5.25%, according to Knight Frank's UK Real Estate Navigator. That level of investment is still well below trend, but private investors are taking their opportunities while they can. The quarter's largest deal was the sale of Bloom, which was acquired by a private investor for £216 million. The building is leased primarily to Snapchat and well located in Clerkenwell/Farringdon, where leasing fundamentals remain relatively attractive. In fact, leasing activity across the City & Southbank as a whole was a fraction above the long run average during the quarter.
Yields also remained stable at 3.75% in the West End during the quarter. Again, investment volumes are well below trend, but the biggest deals came from familiar names. Landsec acquiring The Printworks & Glasshouse for £90 million was the quarter's largest deal, while the second largest was the acquisition of the Soho Square Estate by GPE for £70 million.
Buying opportunities
"With further selective yield expansion a possibility, our investment markets remain relatively quiet, although we are exploiting these conditions to our advantage," GPE's Chief Executive Toby Courtauld said in a trading update yesterday.
Indeed, the company has become a net buyer of London property for the first time since 2013, Mr Courtauld told the FT. The company is on the hunt for attractively priced older buildings that need to be upgraded - “exactly where and when we hit the trough of the market is always going to be moot. More relevant is that we are finding value,” he added.
Mr Courtauld's comments follow trading updates from British Land and Landsec, each of which expressed positive sentiments. Landsec said values had adjusted to the "new reality" and investment is likely to pick up in 2024 - "having been a net seller when prices were higher, we are well-placed to take advantage of opportunities that will no doubt arise as the new higher-for-longer reality is now more widely accepted," said the company's chief executive Mark Allan.
British Land said its focus on campuses and London urban logistics had enabled it to secure higher than expected rents which, combined with the levelling off of construction costs, is resulting in returns "above its investment hurdles". The forward looking indicators for the London office occupier "are very encouraging with the volume of space under offer 8% above the 10 year average and active demand 27% higher:"
Prime rents
Residential rents across global cities continue to surge, but there are now signs that growth is beginning to meet the limits of affordability.
Luxury rents in our Prime Global Rental Index increased 7.9% in the 12 months to September. This represents a modest increase from the 7.5% growth recorded in Q2 and means rents are now rising at three and a half times their long-run trend rate.
Strong demand from renters facing affordability challenges in the sales market and constrained new supply continues to fuel growth. Despite ongoing debates surrounding work-from-home arrangements, the data confirms the underlying strength of demand for city living and the resilience of accommodation requirements from workers in close proximity to CBDs. However, we see limits to this process in terms of affordability. There comes a point where, even in markets with very strong demand and weak supply dynamics, tenants become unable to keep bidding rents substantially higher.
Three markets stand out in terms of rental growth since 2021. London has seen rents rise by 55.2%, New York by 53.4%, and Singapore by 50.3%. Both New York and Singapore are experiencing slowing rental growth, with rents actually falling over the past three months. For now, London is still seeing double-digit growth, supported in part by strong wage growth, which at 7% is running well ahead of comparable cities at the current time. However, New York and Singapore likely point to the direction of travel for most big-city markets over the next few quarters, with a shift to lower growth reflecting tighter rental market affordability.
The living sectors
Long-term growth in student numbers, coupled with a shortage of beds, continues to drive capital into the student housing sector.
Following the subdued start to the year, a healthy appetite from investors has been recorded in the third quarter with over £1 billion trading hands, bringing year-to-date volumes to just over £2.1 billion. While deal structures are shifting to account for challenges in the debt market, investors continue to look favourably at the counter cyclical nature of the market as a hedge against inflation. We expect a further £1 billion will close in the final three months of the year - see our UK Student Market Update for more.
Also this week, we released our Seniors Housing Annual Review, which includes our largest survey so far of the UK’s leading operators, who offer their views on the sector and share their plans for the next five years.
The sector is now providing more flexibility and choice to seniors than ever before, with more than a third of surveyed operators saying they plan to incorporate more private rental stock in future schemes. With this increase in accessibility, we will also see more private investment into the sector, which serves an important role in overall housing delivery, whilst also helping to reduce the burden on the social care sector and the NHS.
In other news...
UK house prices suffer first annual fall since 2012 (FT), and finally, Goldman signals BOE rate cut in February (Times).