Emerging from the shadow of Brexit, London has taken New York’s crown as the leading city for global real estate investment in 2017.
According to data from JLL, investment in London rebounded by 48 percent from its 2016 lows, supported by significant activity from cross-border purchasers, in particular investors from Hong Kong, the Middle East and Germany.
Having led the rankings in 2015 and 2016, New York slipped to third in the list of top 30 real estate investment destinations, behind Los Angeles which jumped to second.
Strong market fundamentals
London saw muted investment activity in 2016 following the Brexit referendum, with investors adopting a ‘wait and see’ approach. But this proved temporary, with the city’s real estate market enjoying a ‘Brexit bounce’ in 2017 as investor confidence in London – and the UK more broadly – improved.
The Brexit impact has been less than anticipated, notes Head of UK Capital Markets for JLL, Alistair Meadows, explaining that ‘London’s capital markets are closely linked to the occupational markets, where fundamentals remain strong.”
This was evidenced by the record surge in leasing take-up in 2017, with office take-up across central London just short of 11.5 million square feet – around 10 percent higher than the long-term average.
Continued demand saw the West End experience its highest tenant take-up since 2007. Vacancy rates are also low, hovering at around five percent in the West End and the City. With no sign of a mass Bank exodus from the City, occupational performance remained resilient in 2017, which has buoyed investment activity.
Meadows points to a limited supply pipeline as another factor supporting the market, saying that tight development restrictions meant “nearly one third of the lettings in 2017 were pre-lets on developments that are not yet complete. “This trend gave significant additional comfort to investors, who were carefully monitoring the leasing markets following the slow 2016,” he said.
For investors, London’s robust market fundamentals translate into attractive yields that compare favorably to other global cities. With an average of 10 to 15 years, the city’s lease lengths are also significantly longer than many markets while the UK’s robust legal system, along with its market transparency and liquidity all play a part in the appeal.
London’s stellar 2017 was further boosted by the pound’s post-referendum depreciation against the world’s major currencies, which has helped increase the relative attractiveness of UK real estate to overseas investors.
According to JLL data, while foreign buyers have consistently accounted for over half the investment in London real estate in the last 10 years, in 2017 they made up almost 80 percent of the activity.
In particular, the year saw a significant surge in Hong Kong and mainland Chinese capital, which accounted for approximately 35 percent of the total investment flows, says Meadows.
This included the completion of two landmark deals: the £1.3 billion acquisition of the ‘Walkie Talkie’ building by Hong Kong food conglomerate Lee Kum Kee, and Hong Kong-listed CC Land’s £1.15 billion deal for the ‘Cheesegrater.’
There was further strong activity from Middle Eastern and German investors, with Deutsche Asset Management, Union Investment and Deka Immobilien all making significant acquisitions.
Not surprisingly, the capital’s office sector enjoyed most of the investment activity in 2017, accounting for more than half of the total capital flows. But Meadows says that other sectors, such as student housing, are attracting interest as a “source of value and sustainable income streams.”
In December, for example, JLL closed an £870 million London-centric student housing portfolio sale to the Goldman Sachs and Wellcome Trust partnership ‘iQ’.
And what of London’s prospects for the coming year? Much of the same, according to Meadows who expects ‘2018 to carry on from 2017, with strong investment activity continuing, driven by international capital and conducive market fundamentals.
“Barring external shocks, we believe London will retain its number one global ranking,” he says.
Click to read about how Europe has made a comeback for real estate investors.