London office news 28th June 2013

Total office investment transactions across central London reached £5.4bn in the first six months of 2013, according to research prepared exclusively for CoStar News by DTZ, as demand continues to outstrip supply in the capital.

The agent found that central London office investment volumes in the first half of the year stood at £5.4bn, a fall from the £7.6bn transacted over the same period in 2012, although DTZ contends that this trend has been driven by a lack of openly marketed stock, as opposed to investor demand which remains substantial and diverse.

Notable recent transactions in the first half of the year include Lembaga Tabung Haji’s £205m purchase of 151 Buckingham Palace Road, SW1 from Ivanhoe Cambridge, Oxford Properties’ £235m purchase of 10 Paternoster Square, EC4 from Mitsubishi Estate Company and Ping An’s £260m purchase of the Lloyds Building, EC3 from Commerzreal.

Ben Cook, Senior Director in DTZ’s Central London Investment team, said: “2012 may have been an exceptional year in terms of the volumes traded in the Central London market but the £5.4bn of deals so far this year is also a very positive reflection of the continued and robust demand for London property. Even with reduced supply, full year volumes could well be in the region of £8-£10bn, which is more in keeping with typical annual volumes since 2007.”

Availability of on-market opportunities has become more limited over the course of 2013. DTZ is currently tracking £3.95bn of commercial properties for sale in central London, of which £2.34bn is at bids stage or under offer. Availability stands at circa £1.61bn, around 20% below the £2.01bn available at the same time last year.

Reflecting the low level of on-market availability, DTZ has recorded a total of £1.5bn of off-market transactions since the beginning of the year, as buyers are forced to consider unmarketed stock. Off-market deals accounted for 28% of total investment by volume. “There has been a continued and sustained demand for investor grade London investment opportunities since the turn of the year,"Cook added. “We are currently tracking over £20bn of domestic and overseas equity which is targeting the central London market. This huge weight of capital is becoming increasingly frustrated with the low level of on-market availability, and consequently we have seen a substantial increase in the volume of off-market deals undertaken in the first half of the year.” The first half of 2013 has also seen a continuation of investor appetite for London investment transactions in excess of £100m with £3.2bn of deals done over this lot size.

Cook said: “Thus far in 2013 we have seen 15 transactions over £100m, which is broadly comparable on a pro-rata basis to the 34 deals over £100m in the whole of 2012. Large lot sizes remain highly liquid both for refurbishment and development stock, together with prime, longer dated income investments.” Overseas investors have continued to dominate purchasing activity, the agent said with 76% of all deals being undertaken by non-domestic buyers in the first half of 2013, marginally higher than the proportion in 2012, which stood at 72%.

Overseas interest has again been lead by investors from the Asia Pacific, which undertook 31% of all purchases. In particular, investors from Malaysia and South Korea have continued to be highly acquisitive, with deals such as Samsung Asset Management’s £142m purchase of 30 Crown Place, EC2 from Hannover Leasing.

Chinese investors have become more active in London over the first half of the year, and there is continued demand from a variety of other Asian investors, including those from Japan, Singapore and Hong Kong. Cook added: “At present we believe that demand for London property from Asian investors will increase further, and we see the recent deregulation of a number of the Taiwanese life funds as a key new source of capital.” DTZ reported that Middle Eastern investors accounted for 19% of all office investment deals and North American investors accounted for 14%, a figure matched by investors from Europe, with DEKA again amongst the most active investors.

The West End market saw the highest total sale volume with £2.1bn transacted in the first half of the year, followed closely by £1.9bn of deals in the City of London and £700m of deals in the Mid-Town and Southwark markets.

Fergus Keane, Head of West End Investment said: “The diverse and competitive nature of demand for West End assets has resulted in competitive bidding for the most attractive buildings, particularly where there are asset enhancement or repositioning opportunities. This, coupled with a general lack of supply, is resulting in buyers actively pursuing off-market deals such as Wing Tai’s recent £36m purchase of 10 Brook Street or Crosstree Real Estate’s £83.5m purchase of 43-48 Dover Street.”

Martin Lay, Head of City Investment, said: “On-market supply of City transactions remains low. The vast majority of the well-priced properties that have come to the market since Easter are now under offer or have been traded. The market also remains highly liquid for large lot sizes, and we anticipate significant investor interest for Land Securities 2 & 3 Bankside, and Helical Bar’s 200 Aldersgate, both of which have just been offered for sale.”