London’s West End investment market would make an excellent Benetton advert, with UK investors standing shoulder to shoulder with their Middle Eastern, European, Indian and US counterparts. But, like any ad, the image needs continual updating. Last year it was the Brits who took centre stage, with the number of buildings purchased and the highest value of deals. According to Jones Lang LaSalle, they had an impressive portfolio of 120 buildings with a total value of almost £3.1bn.
JLL figures for the first two quarters of this year show that, while UK funds, institutions and private individuals are still responsible for most deals, the number of buildings purchased so far is less than half that of last year, at 41, with a total value of nearly £1.2bn. What is more, Middle Eastern families have begun to eat into the Brits’ portfolio, and Irish investors have continued their enthusiasm for London property, notching up more than £500m of deals so far.
“Middle Eastern families have already bought over £400m worth of stock, and there’s another £580m under offer,” says Julian Stocks, director of West End investment at JLL. He adds that the families are looking for trophy buildings, and have so far purchased 1 Curzon Street, W1, for £280m, the Time & Life building at 1 Bruton Street, for £107m, and 16 Berkley Street, W1, bought for £39.4m. In addition, Grand Buildings in Trafalgar Square is under offer to a Dubai-based family for over £150m. Rising oil prices are fuelling the spending spree, as is the desire from the families to spread their wealth around.
The growing number of new faces in the market has also taken stock away from UK investors. Last year, Indian investors spent almost £50m in the West End. With China’s economy going from strength to strength, Ashley Marrison, investment partner at CBRE, believes the Chinese will play a bigger part in the West End investment scene over the next few years.
Agents fear a lack of stock
Dominic Amey, senior surveyor in investment at Colliers CRE, claims the amount of stock both on the market and in the pipeline is enough to satisfy investment demand. He says agents are “always complaining that there isn’t enough stock”. But there are worries, nonetheless, that the supply of new grade A stock is starting to dwindle.
“There’s two years’ worth of grade A supply left,” says Stocks, who adds that this is assuming “we get standard take-up”. He says the average annual take-up in the West End is around 2m sq ft. At the moment, there is 3m sq ft on the market and another 1m sq ft under construction. After that, there is very little coming through.
The situation has seen investors retaining stock, which has resulted in prices rising. Simon Heilpern, partner at DE&J Levy, cites the example of 25 Park Lane, W1, where rents have risen by 12%, from £80 per sq ft last year to £90 per sq ft today. “People have said that is a one-off, but if you feel the pulse of the market, that is how it’s operating,” he says.
British Land’s sale of 2-16 Baker Street, W1, is another example of how keen investors are to acquire West End property. The building was put up for sale in 2003 at an asking price of £47.5m. It has now been bought by Northern Ireland developers McAleer & Rushe for a reputed £55m. The yield was quoted at 7.5%, although that was before BDO Stoy Hayward announced it was relocating from the property.
USS’s purchase of Golden Square inAugust also shows the strength of the investment market. The investor bought Benchmark’s 44,000 sq ft redevelopment from GE Real Estate for £40m. According to JLL’s Stocks, once let at an average rent of £52.50 per sq ft, the acquisition represents a yield of 5.5%. However, the building has been vacant since completion a year ago.
How much are investors willing to pay?
CBRE’s Marrison warns that the growing interest in West End investments is forcing more risk taking. “Some property transaction prices are being paid where the property fundamentals do not reflect the high prices being achieved, and there’s more fragility and risk,” he says. “You have to ask how much someone is willing to pay, and how much will yields fall.”
He says that investors are hoping to get good rental growth, and that the market now “feels like the equivalent of people trying to buy technology shares in 1999. It feels like people just want exposure to the market.”
Does this mean the West End market bubble will burst as dramatically as the dot.com’s? No, says Marrison, pointing out that the conditions are quite different. “If you look at the current economy, you have a recovering stock market, low interest rates, and an improving West End occupation market.”
Certainly, because there is a lack of new stock, there will be a rental growth, andJLL’s Stocks predicts a 20% leap in prime West End rental levels over the next few years. This will keep pressure on yields, especially for grade A, rack-rented stock, where vacancy levels are low.
This is good news for investors and the international funds, such as German closed ended funds and US/Canadian money, which are relative newcomers to the market. It is also helping to maintain a stream of candidates for the next Benetton advert.
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The 7 July bombings had a direct effect on West End retail. Ashley Marrison, investment partner with CBRE, says there was an immediate drop in retail sales directly after the bombings, but that it was short-term. “There was an issue with tourists coming, but it dissipated very quickly,” he says. Julian Stocks, director of West End investment at JLL, says there are more reasons than just the bombs. “London bombs combined with the congestion charge, lack of confidence in spending compared with six to 12 months ago, Kensington High Street’s Barker’s closing, Dickins & Jones closing. There’s bound to be a bit of knock in investors’ confidence in retail. It will hold back rental growth.” Private investors, however, do not appear to have been put off buying retail, despite all the stories of sales dropping, the London bombings and so on. The Corporation of London’s Sedley Place on Oxford Street, W1, was sold for £65m in August at a yield of 4.5%. Meanwhile, Merseyside Pension Fund has appointed Savills to dispose of its freehold investment at 324 Oxford Street, W1. The 5,190 sq ft prime unit is let in its entirety to Starbucks Coffee on a 15-year lease from January 2001 at £424,200 pa. The pension fund is seeking offers in excess of £9.9m, representing a net initial yield of 4.1%. |
