Competing for Global Capital
The investment landscape changed considerably during 2022 as interest rates rose rapidly to curb accelerating inflation across the developed economies.
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This has precipitated a marked slowdown in London office transactions in recent months. The results of our recent Global Capital Tracker Survey suggest the weight of money targeting London offices is likely to fall in 2023. Higher levels of risk aversion will provide greater opportunity for private capital to be deployed as we see a moderation in actual transaction volumes this year. We are forecasting transaction volumes of £9.5bn, slightly below the long-term trend of £9.8bn.
Shabab Qadar – London Research Partner
Reduction in weight of money targeting London offices
The competition for global capital will likely intensify in 2023 as markets will be less liquid and underwriting transactions especially challenging whilst central banks continue to increase interest rates. Up to three-quarters of transactions in London are from investor groups that require efficiently priced capital to fund transactions. Amid this backdrop, the results of our 2023 Global Capital Tracker Survey of real estate investors confirm expectations of the weight of capital targeting London offices to fall £5.5bn to £43.8bn. All regions are expected to see a reduction in the weight of capital they intended for allocation to London offices. Investors are concerned about greater levels of market risk as average weightings of real estate in portfolios could exceed target levels because of the relative under-performance of other asset classes.
The Asia Pacific and Greater China regions remain the largest investor groups with capital intended for London with £9.7bn and £9.6bn respectively and almost 45% of the total weight of capital. Investors from Europe account for almost £7.2bn (16.5% share), North American investors with £5bn (11.3% share) and United Kingdom £4.6bn (10.5% share). Although, this is a fall it is in line with pre-pandemic levels.
Although, there has been a fall in 2023, the weight of money chasing London is almost seven times the levels of available institutional grade stock which is currently £6.3bn.
Risk aversion can provide opportunity
A look back at our transactions data shows that periods of risk aversion result in much lower levels of transactions from investor groups that are unable to access efficiently priced credit. However, these periods are accompanied by a rise in transactions from private investors particularly for higher lot sizes as there are fewer competing bidders. For example, during the GFC and Eurozone debt crisis private investors increased their share of all transactions volumes to 30% which compares to an average of 20% in the five years prior. Similar trends are evident during the high inflation period of the early 90s, the period of uncertainty that followed the Brexit referendum and more recently during the pandemic.
The role of private capital in commercial real estate is increasingly growing. In our 2022 Wealth Report we highlighted private capital investment grew globally by 52% during the pandemic period to $405bn and 38% above the average of the last five years. Moreover, private investors had allocated an average 27% of their wealth to commercial real estate. Moreover, almost 25% of investors which we surveyed intended to increase investment in the sector.
Actual investment transactions projected to rise modestly in 2023
In our recently released Active Capital Report we showed the projections for cross-border capital flows using our proprietary Capital Gravity where we use the latest machine learning and regression techniques alongside unique datasets to predict the flow of real estate capital in 2023. The results show the office sector to be the most active sector globally and countries such as the UK with greater levels of liquidity and inflation hedging potential to be the main beneficiaries of cross border real estate investment.
Our suite of forecasting models includes a London Capital Gravity model where we use our proprietary deals data to forecast actual transaction volumes. The results of our model show an expectation of global investment volumes falling by 17% to £9.5bn. This is slightly below trend levels of transactions in London offices of £9.8bn. This follows two years where the value of actual transactions grew by nearly 50%. The top three investor groups by nationality are the APAC region with £4bn of transactions (42%), Europe with £2.3bn (25%) and North American investors with £1.7bn (18%).
Private investors have historically accounted for an average 20% of transactions in London. We expect this to rise in 2023 to 25% and potentially investing £2.4bn this year.
View our London Report Capital Gravity map, which shows an interactive view of London real estate investment over 20 years.
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