Welcome to the BBG half-time review of London’s Capital Markets in 2017. In January we made a few predictions for the year have proved accurate so far; we’ve continued to see new entrants from Asia, especially China and Hong Kong, the REITS have generally stayed away, pricing for sub £30m lots has outperformed and the serviced and co-working office sector has continued to flourish. However, no sign of prime yields moving out as we thought they would. In fact, quite the opposite, as investors have sought out trophy assets and long term income, a trend that will continue for the remainder of the year.
Undeterred by the prospect of further embarrassment, we’ve jotted down a few thoughts on the year so far and how it might develop in the second half. A more detailed summary of the first two quarters is also available on request.
2017 – H1 Review
- The market clearly endured a poor Christmas because really not much at all happened in 2017 Q1.
- Maybe a walk in the hills helped spur investors into action, but Q2 was a different story. Activity in every respect was up; bigger deals, more of them and a wider spread of investors.
- While Brexit is still a factor for some, the overwhelming view is that London’s fundamentals have retained their appeal to investors willing to take a long term view.
- The trophy asset sales got all the headlines, but appetite was evident all along the risk curve in the first half of 2017.
- There are headwinds in the occupational market; increasing vacancy rate, 7m square feet under construction in the City, what happens when WeWork stop taking pre-lets of 250,000 sq ft?
- Oh, and someone called a General Election.
Looking forward over the next 12 months
- Investment from mainland Europe will continue to be strong, particularly from German institutions and private investors although probably not the French who will still be on a lunch break.
- Some investors will hold back as they wait for clarity on Brexit negotiations.
- The London economy is still expect to outperform the UK average as well as European competitors such as Paris and Frankfurt.
- London’s economy is forecast to expand by 2.4% in 2017 before slowing to 1.8% in 2018.
- Diversification of office base will continue to underpin an otherwise weaker occupational market. But it could soften materially if take up from the serviced office sector slows down and/or there is a significant addition to supply of “grey market” space.
- Pricing will only soften if there is a significant reduction in the flow of capital from Asia, particularly China and Hong Kong but this seems improbable in the short term.
- 2017 volumes will eclipse 2016 – we already know about 20 Fenchurch Street and 70 Gracechurch Street which have happened in the early part of Q3 and there are more big deals in the pipeline for the remainder of 2017.
- With interest rates likely to remain low for the foreseeable future, private investors will continue their love affair with property as a means of generating income and wealth preservation.
- As a consequence, smaller lots (sub £20m) will remain much in demand with yield compression and increasing capital values likely to continue in this sector.
- If you took overseas investor activity out of the equation it would have been a very different picture for Central London capital markets, but if Man U hadn’t had Zlatan Ibrahimovic last season, they would have been useless, but they did and they weren’t.
- The reality is the London market remains hugely attractive to overseas investors and like the Premier League, that appeal is enduring.
- If another General Election is called this year, the only voters will be the 650 candidates and their immediate family. The rest of us will be watching the footie.
The EGi’s latest survey ranked us 13th by investment activity in London over the past quarter. Please click here to see this table.
For those of you who want some more detailed statistics on Q1 and Q2, a separate document is available on request. Please contact either [email protected] or [email protected] if you would like to receive a copy.
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