The announcement that the Brexit deadline is now extended to the end of October means that we’re caught in a medium-term “no-man’s land”. The general consensus suggests that either a short-term or a much longer-term extension would have been preferable.
Since the referendum, London’s commercial investment market has performed remarkably resiliently, through a combination of strong office take-up levels and the dominance of international investors that continue to see London as the primary target for capital. Once we were through the initial shock of the referendum result (end of 2016), and with the deadline of March 2019 two+ years away, corporates and investors got on with business.
However, as we’ve approached the end of that waiting period, and following the rejection of Mrs May’s withdrawal proposal, greater hesitancy appears to have descended.
The story behind the figures
Our Q1 investment turnover figures – which account for all deals to have unconditionally exchanged or completed by 31 March – show that investment in London (City and West End) rose to £3.2bn, a 28% increase on the £2.5bn invested in the same period last year.
That said, it includes Citigroup’s £1.1bn purchase of its own headquarters at Canary Wharf – a cost-saving deal for the bank that arguably stands apart from the conventional investment activity. However, as a capital transaction, it needs to be included in the overall investment figures. If you regard that particular transaction as an outlier, then clearly turnover is lower than Q1 2018 and Q1 2017.
Given the uncertainty of Brexit, it is understandable that some investors are displaying more caution when deploying the vast sums of capital that London has enjoyed over the past 10 years.
However, while activity is more measured, compared with some very strong trading in the past two to three years, it is interesting to note that the appetite for major transactions recently has been focused on more opportunistic and development-led deals by mainstream UK and international property companies, such as the bidding on the BT headquarters in the City and the former ITV site on the South Bank.
This demonstrates the longer-term confidence in London’s future given the higher risk profile associated with these types of transactions.
Keeping their powder dry
We’ve yet to see a mainstream £100m+ prime core asset trade this year, and so evidence on where prime yields rest remains untested. Korean investors were the main players for core income assets last year but are now more absent from our market and busier in Europe.
There is no specific overseas national group leading the charge for prime product, though there’s clear evidence from the various meetings we’ve recently had of an ongoing appetite for prime deals spread across a wide group of global investors.
I expect we could be pleasantly surprised at just how strong this appetite remains for the prime end of the market, if only the product was made available. Owners, however, are generally hesitant, fearful that offering a sale today with the Brexit cloud overhead is an invitation for some unwelcome derisory offers.
It’s important to remember that the draw of London as a commercial investment market is a “known known”; the freehold tenure, transparency of data, a landlord-supportive product and strong liquidity are some of the hallmarks of our market that perhaps we sometimes take for granted.
More significant is the driving force behind the incoming capital, as the Hong Kong/Chinese in 2017 and the Koreans in 2018 demonstrated. When they do arrive, it has tended to come with a much lower cost of capital, which explains the strong prices we have witnessed.
More low-risk capital is ready to be deployed once the fog of Brexit has lifted, and London is still very much regarded as one of the pre-eminent locations for these funds in a challenging global environment.
Stephen Down is head of central London investment at Savills
