COMMENT: Few could have predicted the storms that buffeted global markets in 2016.
Real estate was not immune. Our Cycology research into the sentiment of real estate leaders found they now consider uncertainty to be the “new normal”, with politics, capital flows, currency and debt playing an unprecedented role in the real estate cycle, together with the traditional fundamentals.
Investors also took note of London’s safe-haven status and its preference to remain following the UK’s vote to leave the European Union, and perceived the results of the recent US elections. At a time of heightened risk, it is large, liquid and diverse markets, such as London, that benefit. It would be incorrect, though, to say that it outshone its fellow European markets of Paris and the major German cities.
The UK investment market slowed in 2016 after two exceptional years, but London remains a target for international capital. Global allocations to the capital’s real estate continue to increase, and around two-thirds of investment last year came from overseas.
Non-UK investors, having already pocketed a 10-20% discount post-Brexit owing to the fall in the value of sterling, continue to be active, having purchased £3.2bn of central London offices in the fourth quarter last year. We expect investment volumes to be down in 2017 but still close to the city’s long-term average.
Demand for long-let income has hardened across all sectors. Investors are also conscious of demographic and digital trends, to the benefit of the under-supplied residential, logistics, and the capital’s prime retail sectors. Amazon’s requirement for London retail is an interesting trend – is online going offline?
London overtook New York to rank first in 2016’s Global Power City Index, assisted by its access to world-class transport links. London’s connectivity, long a cornerstone of its success, will be further enhanced by Heathrow expansion, Crossrail and High Speed 2.
The report also highlighted London as Europe’s fastest-growing technology hub, with the number of businesses increasing by 46% since 2012 to 46,000. The finance sector remains important, but over the past five years media/tech occupiers have represented a larger share of the office market – providing further diversity and renewing London’s connectivity for a digital age.
Above all, London continues to attract the best and brightest talent. Apple’s commitment to Battersea and Wells Fargo’s prelet in the City were among the bellwether deals that delivered a major vote of confidence last year.
There is uncertainty ahead but, beneath the political squall, London’s fundamentals are solid and there are good reasons it is still seen as a safe port in a changing world.
John Slade is chief executive of BNP Paribas Real Estate
