Overseas investment into Central London offices will jump to £60 bn over the next five years, the highest five-year total for over 20 years, Knight Frank said at the launch of its annual London Report.
This year, the agent predicts overseas money deployed in the UK capital will increase 17% to £10.5bn, while UK investors will also be buying because many are now underweight in the sector - they are predicted to account for 25-30% of transaction volume. Total deals in London offices in 2021 were £12.3 bn, £3bn more than the quiet 2020.
Shabab Qadar, London research partner, told an audience of several hundred at London’s new Nobu Hotel, that: ‘Overseas investors like London offices for price advantage over other cities, income and for wealth preservation...Growth will also be driven by pent-up demand being released as cross-border travel restrictions ease and with peak uncertainty around Covid and Brexit now behind us.’
But demand for ‘best in class’ prime - with strong lease terms and the now all-important sustainability credentials - ‘outstrips demand.’ Philip Hobley, Knight Frank’s head of London, said the main challenge for investors was ‘how to get capital into the market - they are finding it incredibly competitive and nuanced.’
Oliver Knight of Knight Frank’s development team said a lesson from the pandemic was that developers, occupiers and investors were all also looking for assets in locations with ‘a dynamic mix’ of living, work and leisure activities which attracted talented employees. Colleague Jonny Lee added: ‘London is diversifying away from developments dominated by one use.’
Large-scale, office-led mixed-use developments coming down the track include those at Canada Water, the South Bank, Earls Court, Euston and Brent Cross.
Lee pointed out that developing mixed-use projects can also ‘accelerate delivery..London’s mayor has left us in no doubt that affordable housing is going to be with us for years to come.’
Knight Frank predicts that US institutional investors will be the most acquisitive in the 2022-2026 period, with £15 bn expected to be allocated towards London office assets. Substantial volumes of capital from Germany (£6.6 bn), Greater China (£6 bn), Singapore (£5.5 bn) and South Korea (£4 bn) will also fuel record investment activity.
The agent also claims that London has the greatest number of BREEAM-rated stock, estimated to be around 1,078 offices, which it says is more than double any other European gateway city. Those with ‘Very Good’ or ‘Excellent’ ratings command 10-10.5% premiums.
Knight Frank’s Oliver Sprackling pointed out that only 20% of trades in 2021 were prime buildings: ‘Expect value add volumes to steadily increase as owners look to divest (these),’ he forecasted.
Occupiers 'still working out signals'
London experienced high take up in 2021 with around 8 million sq ft leased, ‘and we expect the same in 2022’, said Shabab, adding that 3 million sq ft was under offer at the end of 2021.
The firm predicts 7% prime rental growth this year in core submarkets. These include areas of the capital such as Kings Cross and South Bank which have already seen 55% and 60% rent rises over the past five years, outpacing the core central London districts.
However, while rents have been rising, rent-free periods offered to tenants are still at 27 months in the City and 24 months in the West End. Meanwhile, occupiers were ‘still trying to work out the signals’ regarding hybrid home versus office working, said Lee Elliott from the occupier team.
Colleague Eleanor Mardle said there was ‘no uniform approach’ from businesses in this regard. ‘One tech client of ours has had great difficulty deciding on their requirement, initially increasing it, then it subsequently declined.’
Elliott predicted that ‘many’ organisations would ‘dial back’ on hybrid working and adopt an ‘office first’ position.
https://www.knightfrank.com/london-report