West end offices 16th October 2012

London’s West End office sector has been the best performing UK investment market over the last year, according to an IPD/H2SO report.

The report finds that more than £3bn of London West End office assets changed hands in the year to June “reinforcing the location as the UK’s top performing office investment market”. The IPD and H2SO research analyses the performance of more than £10bn of assets between June 2011 and June 2012. In the 12 months to the end of June 2012, West End offices delivered a year-on-year return of 10.8%. In the same period, City of London offices had total returns of 6.7% while the All UK Office measure showed returns of 5.7%.

The report finds that the economic uncertainty that has dampened the performance of many markets has been more than offset in the West End by demand from international investors looking to buy into a low-risk environment with sound fundamentals. Following the financial crisis in 2008, West End capital values fell by in excess of 42% but are now only 16% below their 2007 peak.
 
Investment values are now being driven by “safe haven” investor demand, and rental growth fuelled by a lack of Grade A office supply. During the research period, overseas investors were responsible for 62% of all acquisitions in the West End which equates to around £1.9bn of spending.

By contrast, UK entities were on the selling side of 75% of the deals done (circa £2.3bn). Greg Mansell, Head of Research at IPD, said: “International investors want a safe home for their capital, for which the West End is ideally suited.

But UK funds are finding their returns elsewhere, and taking advantage of the high prices to get out. “Average initial yields have sharpened to 4.4%, and the level of income is now no longer high enough for some investors, which is encouraging life funds to be net sellers.” However, there is little sign of investor demand abating and this is triggering a fresh flow of assets onto the market. H2SO investment partner, Rob Hayes, said: “The third quarter of this year – a quarter which is traditionally quiet – saw more than £800m of transactions in the West End market. “By the end of October, around £1bn of office investments will have come to the market in the course of six weeks.

This would ordinarily pose questions about investor appetite, but in the current market there seems to be every indication that there is adequate demand to meet the supply.” In addition to strong investor demand, West End values are being sustained by a muted supply environment in the leasing market which is producing rental growth.

As at the end of June, 1.15m sq ft of new space was estimated to be available by the year-end, but since then nearly 160,000 sq ft of this has already been let and there is at least a further 100,000 sq ft of space under offer. The technology, media and telecoms (TMT) sector has been responsible for the majority of take-up in recent months, and there are currently more than 500,000 sq ft of requirements from TMT occupiers who are considering space in the West End.

Total space take-up in the West End is currently running at an average of more than 4m sq ft per year, and there is a substantial fall in the supply of new office space expected in 2014 when just 418,000 sq ft is due for delivery.

H2SO Agency Partner, Paul Smith, said: “Looking ahead, we expect that while there will be spikes of availability in certain submarkets – the muted supply environment is set to continue between now and 2018. “Accordingly, occupiers looking for substantial amounts of Grade A space will not be confronted with huge choice. Against this backdrop, rents should continue to be progressive both in core and non-core West End locations.”