As we settle into 2017, no doubt there are a number of investors pondering over the prospects for the UK and London property markets, with uncertainty surrounding Article 50, European political instability and ‘Trumponomics.’
However, as we have witnessed in 2016, with uncertainty comes opportunity. The fundamentals of the prime central London retail property investment asset class remain strong, offering investors a safe haven status, and access to a highly transparent and liquid market.
While a number of asset classes across the investment spectrum faced headwinds, volatility and uncertainty in 2016 – both pre and post the vote to leave the EU – the Central London retail market held strong, offering investors a global safe haven.
Investment volumes for Central London retail property totalled £2.1 billion in 2016 across 70 transactions, compared with £3 billion in 2015 and £2.5 billion in 2014. While volumes were noticeably down on previous years we witnessed some particularly large transactions. On the ground, there is no let-up in investor appetite or indeed pricing being achieved in the market.
Six key deals
A large proportion (approximately £1.14 billion (67 percent)) of the total market volume in 2016 was weighted to six transactions on Oxford Street, with a further £299 million in three transactions on Bond Street. 71 percent (£1.03 billion) of the total annual volume traded in the aftermath of the June 23rd EU referendum.
British Land sold the Oxford Street Debenhams department store in July for £400 million to a private European retailing dynasty. In August, (Norges Bank Investment Management, in what has been described as near record breaking speed, purchased Boots’ flagship store at Sedley Place, 335-361 Oxford Street, within five days for a price of £124 million. Both transactions demonstrated the continuing depth and velocity of capital in the investor market in the wake of the EU Referendum.
In September, Oxford Properties and the luxury retailing group Richemont purchased Mulberry’s flagship store on New Bond Street from Aberdeen Asset Management for £198 million. More recently the Great Portland Estates development at the eastern end of Oxford Street, next to the new Elizabeth Line entrance on Dean Street, was sold to Norges Bank Investment Management for £276.5 million. The development is pre-let to Benetton and New Look.
Maintaining international appeal
Global currency fluctuations have presented attractive buying opportunities to foreign investors, particularly those from Europe and US dollar denominated countries. Overseas investment accounted for 80 percent of the total volume traded in 2016, up from 65 percent in 2015. The predominant source of overseas money was from European investors.
The weakening of the pound has also assisted in driving increased tourism, footfall and spend in the prime retailing destinations within London, although many of the luxury brands have been quick to start adjusting their prices. Include Visit Britain tourism forecast stats?
The indicators for long term rental growth and resilience in London remain positive. Year-on-year footfall across the West End increased by +8.2 percent on average in the three weeks leading up to Christmas.
London’s status as a retail powerhouse, coupled with currency deflation, has attracted droves of Chinese, American and UAE tourists keen to spend their cash. JLL expects demand from retailers to remain robust going in 2017 and 2018. For most international retailers, having a flagship store in London is critically important for brand positioning and exposure.
There are several headwinds gathering force as we enter into 2017, however. The business rates revaluation, which comes into force in April, will result in a further rebalancing of the level of premiums paid in the market by retailers, and will impact on short term rental growth expectations as the overall occupancy cost for retailers becomes apparent, and occupational models recalibrate accordingly.
The rates revaluation may have a particularly effect on the small, private independent businesses, which lack the scale and capacity to absorb the uplift in cost across a wider platform – often these retailers and restaurateurs are the ones bringing vitality and place making to a street/estate. It is vital that landlords are sympathetic to these operators, in order to retain this unique heritage and point of difference in their wider London estates. However, there remains a ready supply of UK and international retailers keen to take stores in London. The opening of Elizabeth Line in 2018 will further cement London as the No.1 investment, retailing and tourist destination in the world.
The ‘success attributes’ of the UK capital city will continue to ensure that London remains a magnet for international capital, tourists and business visitors alike in 2017.