2018 Capital Markets Review & Predictions for 2019
2018 Capital Markets Review & Predictions for 2019
26th February 2019
Welcome back to the BBG review of 2018 and the mug’s game that is making predictions for 2019 – maybe the year when – absolutely nothing happens at all as the UK’s exit from the EU is delayed, or, when all hell breaks loose and the UK crashes out with no deal. Right now, in the interminable penalty shoot-out, all outcomes are still possible, but who wouldn’t be worried given the nation’s appalling record in these events.
2018 – Review
Overall investment volume for Central London in 2018 was around £17bn, slightly down on 2017, as predicted by BBG, but still well above the 10 year average.
Of that £17bn, £12.14bn alone was in the City, spread over 148 transactions.
A good result and another example of global investors’ continuing to see value in London compared to other world cities and, really, we should no longer be surprised given the enduring attractions of transparency, a diverse occupier base and a critical mass of skills.
Again, overseas capital accounted for the vast majority of transactions in Central London – in 2018 it was 78%, about the same as 2017.
In the City, Asian investors alone were the biggest players, scooping up 52% of total investment. This time though, it was the Koreans turn to take top spot.
Notable deals during 2018 included; 5 Broadgate (£1bn – CK Asset Holdings), Cannon Bridge House and 20 Old Bailey (£248m & £341m, both Mirae), 70 Farringdon Street (1.165bn- NPT Korea) and The Adelphi (£550m – Punta Gadea).
Even the UK REITS got in on the act with BL buying around £100m of assets over four buildings and Land Securities spending £87m on 1.6 acres in Lavington Street, SE1, their first significant purchase in Central London in over 10 years.
At the beginning of 2018, we predicted an uptick in demand for higher risk assets but this didn’t materialise as buildings traded during 2018 had an average vacancy of only 8%, reflecting investors’ preference for well-let assets.
Prime yields in the City edged down towards 4.00% by the end of the year and stayed at 3.50% in the West End. Still very competitive compared to major cities around the globe where the yield range is 2.5%-3.5%.
Vacancy across central London now stands at a historic low of just over 5.00%. This represents around 17 months’ supply, based on long-term average take-up levels.
TMT remained the dominant sector in the occupational market, accounting for 38% of take up. Second was the finance sector at only 19%.
Prime headline rents have declined by about 2% over the last 12 months across Central London and by around 5% in the City which now stands at around £78.00psf.
2019 – Predictions
The first half of 2019 will be the quietest period of activity in Capital Markets for some time.
What happens during the second half of 2019 is entirely dependent on the outcome of Brexit negotiations; good deal, or bad, there will be a price adjustment.
Those anticipating an orderly exit, with a deal of some description, can expect an early bounce in values as new stock hits the market to satisfy pent up demand.
By how much? Probably only negligibly in the first instance as values adjust to pre Referendum levels. Later on, as rental growth kicks in, capital values will move forward at pace, particularly if mainland Chinese investors return in numbers.
Those anticipating a no deal Brexit will expect to see values fall significantly in the immediate aftermath.
By how much? With fundamentals still strong – sub 6% vacancy in the city is not a major concern and overseas capital remains firmly focussed on London – we think not as bad as after the 2008 financial crash (45%) but it could still be up to 25%, initially. However, we think a recovery will come quite quickly as investors take advantage of re-priced assets.
In the longer term, 2020 onwards, we’ll see a return to rental growth in Central London. Precisely when is the hard part, but if it’s an orderly withdrawal, then during the first half of 2020; without a deal it will be late 2020/early 2021.
Regardless of Brexit, we expect demand for long term income, risk averse assets, to continue during 2019, especially from UK institutions.
For investors recognising the current and upcoming shortage of good quality space in the mid-size range – 20,000sqft – 50,000sqft – there will be an uptick in demand for refurbishment and new build opportunities during 2019 for delivery in 2020/21.
Where are the best City locations to look for that now? Anywhere with a Crossrail angle – Farringdon, Moorgate, Liverpool St and Spitalfields all spring to mind. The impact of Crossrail may seem to be in the price in these locations, but the impact of a 10% increase in underground capacity can’t be overestimated. These areas are the true hotspots.
Further out transport infrastructure improvements in Stratford, Battersea, Paddington and Croydon will be appealing to occupiers and investors seeking value outside the core areas.
Outside of this, smart investors will look at locations identified in the 2036 Corporation Plan to extend the city tower clusters; the western end of Fenchurch Street and the junction of Old Broad Street/ London Wall/ Wormwood Street are two such areas.
Are we gloomy about the outlook for 2019 and beyond? Not at all – a hard Brexit would see a short term drop in values which will present investors with an opportunity they can exploit and we expect the correction to be short term as London will continue to retain its appeal to global investors. Exiting with a deal will see an immediate upwards correction in values and a very busy second half of 2019.
Or we could be asking the same questions in 12 months’ time…
And best of luck to you all in 2019.
For a quick review of BBG Capital Markets’ latest deal, click on the link below.