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Investors from abroad dominating London investment market

In the second quarter of 2012, international investors again were the driving force in the London commercial real estate market: 80% of all investments in the City of London and the Docklands came from investors from abroad, in the West End the figure was 57.4%. In central London, an investment volume of £4.36 bn is 21% above the figure for the previous period last year (£3.6 bn). As the international real estate services advisor Cushman & Wakefield (C&W) now reports, this upturn on the London investment market becomes especially clear when considering the fourth quarter of 2011 in which a result of £2.54 bn was recorded.

In the City of London and the Docklands £3.6 bn were invested during 38 transactions in the second quarter of 2012, of which some £2 bn was from 10 transactions. The current quarterly result in this sub-markets therefore stands at 50% above the first quarter of 2012 (£2.4 bn). In the first half-year of 2012 the investment volume therefore amounted to just under £5.5 bn – 70% of which was generated in just 30 transactions (with a total of 71 transactions in the first half of 2012).

As before, the City and Docklands registered strong demand from foreign and domestic investors, yet the supply of modern space is getting smaller in these locations. Only a few new properties have come onto the market recently, and no notable expansion in supply is expected in the coming months. “Nevertheless”, buoys Inga Schwarz, a researcher for Cushman & Wakefield in Germany, “we are expecting investment volumes in the City and Docklands sub-markets that will be comparable to the boom years of 2006 and 2007”.

Investment activity is being observed throughout all risk classes, but the majority of transactions are occurring in the safe medium-term cash flow-generating segment. For example, Plantation House was procured by a private Brazilian investor for £470 million at a net initial yield of approx. 5.7%, and Brookfield acquired a portfolio of three large office properties (1 Leadenhall Court, 125 Old Broad Street and 99 Bishopsgate) from Hammerson for £518 million.

In London's West End an investment volume of £1.29 bn changed hands in 36 transactions. Therefore the result for the first quarter of 2012 (£1.21 bn) was surpassed by 6.6%. Investors from abroad – funds, private investors and property firms – had a share of this amounting to 57.4%. The average transaction volume totalled £35.8 million.

According to the assessment of C&W, the volatile markets of continental Europe appear to be having a positive influence on the still relatively stable London investment market. Demand is high. “In particular in the West End we observe property owners who now want to get rid of their properties. They are assuming that this current phase of high prices is not going to last forever and, accordingly, they are keen to sell off their properties at a premium price; and we see them do this successfully”. Schwarz goes on to explain further: “Every rise in interest rates could put an upward pressure onto lower yields for premium objects”.

Significant transactions in the second quarter in London's West End were the sale of Queensbury House, 3–9 Old Burlington Street, to the Sorgente Group at a price of £167 million – at a similar price to the sale of Stratton House, 5 Stratton Street, to a private German investor; and the acquisition of 333 Oxford Street by Inditex. The Spanish fashion group thus procured the headquarters of its subsidiary Zara. “The last case is an example of how a retailer wants to both secure its brand representation in a particular location over the long-term and also protect itself from increasing rent prices”, explains the researcher commenting on the London investment market. “Given the background of the on-going geopolitical risks globally and the unresolved European sovereign debt crisis in particular, the London investment market could continue to remain in flux – despite a currently rather weak rental market. In the coming months we are also expecting strong demand on the London investment market that just may well see some adequate supply arrive”.