London Office update 3rd July 2012

Total office investment transactions across Central London reached £7.3bn in the first half of the year, underlining London’s status as a key global investment destination, CoStar News can reveal. Research prepared exclusively for CoStar News by DTZ indicates a 66% increase from the equivalent period last year, when £4.4bn of transactions were recorded across the Central London office market. Since 2008, an average of £9bn of office investments per annum have been transacted in Central London, but 2012 looks set to far exceed this figure.

Ben Cook, senior director and head of inward investment at DTZ, said: "At the present rate, we could see total transactions for 2012 comfortably in excess of £10bn, and with an equally strong run-in from September to Christmas, it is possible that total volumes for the year could be over £12bn, a level not exceeded in London since the peak of the liquidity boom in 2007." DTZ has recorded a total of 122 deals in the first half of the year, with notable transactions including Parabola Land’s £235m sale of Kings Place, N1, to DEKA, WELPUT/Grafton’s £166m sale of Stratton House, W1, to a private European investor, and Evans Randall’s sale of Drapers Gardens, EC2, to RREEF/Ginkgo Capital Management for £285m. Overseas investors have dominated purchasing activity, the agent said, with 75% of all deals being undertaken by non-domestic buyers in the first half of the year - a notable increased from 57% in 2011 and the long term average of 52%. Cook added: "London remains a leading global destination for overseas capital. Overseas buyers continue to be attracted by the cornerstones of our long leases, FRI terms and upward only rent reviews, and an investor-grade building stock with world-class tenants.

At present, overseas interest is further heightened due to attractive exchange rates and the potential for rental increases through an undersupply of prime Grade A offices available to lease." Overseas interest has been dominated by investors from Asia Pacific, which undertook 20% of all purchases. Notably, investors from Malaysia and Korea were particularly active with deals such as PNB’s £500m acquisition of 90 High Holborn and 1 Exchange Square, and POBA’s £164m purchase of Thames Court, EC4. In H1 2012, North American investors accounted for 16% of all office investment deals, with deals such as Brookfield’s £518m acquisition of part of Hammerson’s London office portfolio. European investors, excluding those from Germany, increased their London purchasing activity by 75%, now accounting for 15% of all transactions. Investors such as Cityhold, AFIAA and a variety of private European investors were amongst the most active. Buyers from the Middle East also accounted for 15% of purchases, with multinational syndicates of overseas investors accounting for 14% with deals such as ADIA/Rockpoint’s £340m sale of the Devonshire Estate, EC2, to Blackstone.

German buyers accounted for 8% of transactions, largely led by DEKA’s recent purchasing activity. Cook continued: "Investment into London is at unprecedented levels and is coming from a wide variety of locations across the globe. In addition to investors from the traditional overseas markets, we are seeing new investors from South Africa, China, Thailand and South America. We have just advised a Chilean investor on their first purchase in London." Lot size liquidity has also increased over the last six months. The average lot size transacted has jumped from £42m in H1 2011, to £60m in H1 2012. By market, the City of London dominated total sale volumes, with £3.7bn (51%) of all deals occurring in the Square Mile, followed by £1.63bn (22%) of deals in the West End and £872m (12%) of deals in Midtown. Martin Lay, head of DTZ City investment, said: "City investment volumes have almost doubled from £1.9bn in the second half of 2011, to £3.7bn in the first half of this year. "With the weight of unsatisfied demand in the market at present, coupled with only two buildings over £100m presently being openly marketed in the City, we could see heighted competition between investors when new sales are launched post Olympics, at the end of the traditional summer holiday period."
In the West End, strong demand for prime deals has seen £585m of property offered for sale since the beginning of June, including three assets over £100m. Fergus Keane, head of DTZ West End investment, said: "There continues to be strong competition between investors for prime freehold office assets, or those with a genuine asset management or refurbishment opportunity that can be offered to let in the current market cycle where rents have already topped £100 per sq ft in some cases."