2018 H1 Capital Markets Review

7 September 2018

Intro

The first half of 2018 will be remembered by most for the heroic display by England at the Russia World Cup, and for months of British weather that made it possible to plan a weekend BBQ with confidence. Economically, this good weather helped boost UK growth, aiding the economy to expand by a further 0.4% through Q2.

Despite a rapidly approaching Brexit date, using commercial real estate as a benchmark for long-term confidence, Central London is still proving a safe bet for investors. With only a moderate rise in inflation to 2.5% recorded over the past year, and a small stepped increase in interest rates implemented to counter, the UK looks to be achieving a good level of stability in the wake of all the uncertainty.

H1 Summary

  • Central London commercial property investment picked up from a slack £3.6bn in Q1 to finish H1 at a total £10.8bn.
  • The biggest of these deals was the £1 billion (4%) acquisition of 5 Broadgate by Hong Kong based CK Asset Holdings, which was the third billion-plus trade in the past 18 months.
  • With the sale of Goldman Sach’s HQ to the National Pension Trust of Korea agreed at £1.16bn, the next 12 months looks likely to continue the trend of billion-pound acquisitions in Central London.
  • Other notable deals through H1 included the Ropemaker acquisition by Singapore’s HoBee Land for £650m (4.6%), the acquisitions of Cannon Bridge House for £248m (5.2%) and 20 Old Bailey for £341m (4.2%) by Korea’s Mirae Asset Daewoo and the acquisition of the Royal Mint by the Chinese embassy.
  • Despite Brexit approaching, what has become apparent in the first half of the year is that the UK legal system, our levels of market professionalism, continued investor transparency, and our emphasis on global connectivity, has proved more important to investors in the long-term than short-term uncertainties.
  • Additionally, what was also evident, was a return in demand by UK funds hunting for Central London yields, which combined with a more general interest in high yielding opportunities by investors into the capital, led to an increased interest in Value-Add and Long-Leasehold assets through H1.
  • Notable deals in the Value-Add Long Leasehold market were Goldman Sachs £68.5m acquisition of L&G’s Procession House, GR properties acquisition of Juxon House at St. Paul’s Churchyard for £134.5m, and Dorrington’s acquisition of the Hamilton House Business Centre for £18.05m.

Predictions for the next 12 months

  • The rental depreciation we have experienced over the last year is now slowing down, with the rental cycle bottoming out, but Brexit is likely to delay any cyclical uplift until the end of next year.
  • Construction supply levels will continue to fall for the remainder of 2018, as landlord’s are less willing to start new build projects until a pre-let is secured.
  • The amount of Asian capital invested into the City is at record volumes – with £3.4bn invested in H1. We predict a continued rise in Korean, Malaysian and Singaporean investment, and perhaps even an increase in demand for London assets by Japanese investors.
  • UK investors were the second highest City investors (15%) through H1, and we feel that the demand by UK funds to mitigate Brexit risks may see UK investors and funds increase their activity through H2.
  • Additionally, we see the large volumes of investments into alternatives to continue, particularly in Central London Hotels, Healthcare, Logistics and Data Centres, as attractive long lease terms and contractual rental uplifts are a safe bet for funds and private investors seeking long term stability.
  • Overall, in terms of what investors are seeking, there seems to be two more common paths, either long-term stable income streams or higher risk, higher yielding assets in core locations, the rewards in between are less attractive.
  • With no global sporting events in the next 12 months to distract us, it will be a long winter of hysterical political headlines.
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