Direct commercial real estate investment in the UK climbed 41% year-on-year to £8 bn (EUR 9 bn) in the first quarter of 2011, highlighting a return of cautious optimism to the market, according to new research released from Jones Lang LaSalle (JLL).

During the first three months of the year, the UK retained its position as the largest investment market in Europe, the Middle East and Africa (EMEA), capturing 38% of the capital flows, compared with 35% in Q1 2010. Transactions were particularly focused on the Central London office sector due to its 'safe haven' status and the strong occupational market fundamentals.

'Investor focus very much remains on Central London and the South East markets,' said Damian Corbett, head of UK Capital Markets at JLL. 'We are continuing to see huge demand from overseas investors for large prime assets with strong covenants, with particularly aggressive bidding on good income product within the City offices market. The West End office market is now starved of quality stock, and pricing within this and the City office market is already above the long-term cap rate average.'

While JLL anticipates investment volumes will grow by up to 30% this year across the EMEA region, transactional activity within the UK investment market could be restricted by a lack of product. 2011 projections for the UK alongside other core Western European markets are for sub-10% growth, which, while erring on the side of caution, acknowledge that Central European (CEE) real estate markets will be the key drivers of volumes this year.