Capital remains the ultimate global marketplace for property investors

Despite a number of potential headwinds, the London investment market roared back to strength in 2017 with a 33% increase in transaction volumes.
Written By:
Nick Braybrook, Knight Frank
4 minutes to read
Categories: Global UK

Strong demand from investors across the globe meant that London regained its crown as the world’s most active real estate investment market in 2017. Its appeal – liquidity, transparency, high quality stock in large lot sizes and landlord friendly leases – was clearly undiminished post the EU referendum.

The ultimate global marketplace

Our global transactions data shows that London remains the ultimate marketplace for global investors in terms of both the volume and the percentage of cross-border deals. 83% of all transactions were from overseas investors totalling over £14 bn spent in London last year.

London attracted capital from over 15 different nationalities, however the key buyer group was again investors from Greater China.

While investment was, as expected, down from mainland China due to tightening capital restrictions, investors from Hong Kong accounted for 39% of all the money spent on London offices last year.

Global capital tracker

Source: Knight Frank

Into 2018, we do not see investment demand for London letting up. While Brexit will cause periods of uncertainty, we believe that global buyers of London real estate will continue to transact. Using our Global Capital Tracker, we are currently monitoring £46.1 bn of active capital; up 11% from the £41.5bn we recorded at the same point last year. This money remains dominated by requirements from Greater China, specifically Hong Kong, but also including noticeably increasing interest from Japan, South Korea and Singapore.

"We are currently tracking £46.1bn of active requirements; up 11% from the £41.5bn we recorded at the same point last year”

With 39% of transactions last year coming from a single geography, some commentators have voiced concerns over the reliance of current pricing on demand from China. Our Global Capital Tracker shows that rather than reduce, 2018 starts with nearly double the capital chasing London offices from this buyer group.

However, the data also shows a deep pool of demand from a range of other geographies and, while undoubtedly of significant importance, we believe that any subsequent reduction in requirements from China will be quickly replaced. In addition, we are currently tracking an extensive amount of ‘latent’ demand that is currently sitting on the sidelines waiting for any signs of weakness in the market.

We believe that this should prevent any material price falls, and, indeed, expect that some of this money will start to come forward as it becomes increasingly under pressure to deploy over the course of 2018.

New market entrants

Importantly, our analysis of 2017 transactions shows that a large proportion of deals are from first time buyers, who accounted for a third of the transactions over £100 m last year.

London remains the gateway destination for investors who are looking outside their domestic economy for the first time with market transparency, liquidity, language, law, advisors and currency all providing comfort for those on a new journey.

Favourable global pricing

A key driver for continued global demand for London offices is the attractive relative pricing on offer across the capital. London assets remain good value on a global basis with prime yields running at 4.25% for City of London offices and 3.5% for the West End. This remains ahead of not only the major Asian markets but also most of the key European markets as well.

Source: RCA/Knight Frank 

Rotation towards risk

The strong demand and record pricing paid during 2017 drove a number of owners to consider asset sales, and the available stock of opportunities rose considerably in the latter part of the year, particularly in the City market.

Following a relative dearth of availability over the previous few years, this came as a welcome change and helped to drive the high transaction volumes recorded.

We expect that this period of high sales activity has now passed and assets will be brought to the market in a more restrained fashion during 2018.

This market stability will allow investors to continue to take profits and recycle capital; we anticipate that an increasing number of sellers will look to rotate from relatively dry, prime stock into more opportunistic assets given the increasingly consensus view of stabilising rents and a progressively more constrained development pipeline.

"An improving confidence in the underlying occupier markets will support pricing for both prime and, increasingly, for more opportunistic assets”

Outcome

Global investors have shown they are willing to dial out the short-term noise in order to buy into the solid fundamentals and relative value available from London real estate, and we expect them to continue to do so. Indeed, as the outcome of Brexit and the current political uncertainty become clearer, an improving confidence in the underlying occupier markets will support pricing for both prime and, increasingly, for more opportunistic assets.

Nick Braybrook is Head of City Capital Markets at Knight Frank.