Despite commercial transaction volumes being expected to reach around £50bn for 2017 the next twelve months may fail to deliver as strongly due to political upheaval and economic uncertainty, according to the latest analysis from real estate services firm JLL.
But the firm added that such a strong performance this year in the face of continued political upheaval and economic uncertainty demonstrates that there is a long term investor commitment and confidence in the market.
The report says this is especially true of international investors, which account for around half the total volumes across the country, and 80% or more of those in London.
Indeed, investment into London’s office property has surged this year reaching £12.5bn by the end of the third quarter, the strongest first nine months on record and 44% up on 2016.
Neil Prime, head of Central London Markets at JLL, said that while the weak pound has helped international investors get a better deal for their money, their investment criteria remains stringent; a global gateway city with strong fundamentals and that hasn’t changed.
He said: “Amid all the Brexit noise, negative political sentiment and pessimistic forecasts, there is some uncertainty but central London office market fundamentals remain sound in terms of supply. We are seeing new sources of occupier demand from life sciences and sustained activity from the technology, media and telecoms sector which will offset financial sector weakness.”
The research shows that interest in prime London assets has been particularly strong from Hong Kong and mainland Chinese investors. In 2017 nearly £1 of every £2 invested in London offices was from Hong Kong. Food conglomerate Lee Kum Kee paid £1.3bn for the Walkie Talkie building while Hong Kong-listed CC Land’s signed a £1.15bn deal for the Leadenhall Building.
Alistair Meadows, head of Capital Markets, said that interest from Hong Kong is unlikely to change substantially in the short-term. “‘The capital coming in from Hong Kong is a combination of private family money that is seeking to diversify and invest outside the territory, and mainland Chinese money that has been channelled through Hong Kong,” he said.
Adding: “While some capital controls have been introduced that will likely moderate the flow of capital from mainland China, suggesting volumes may be lower going forwards, we believe this trend is set to continue.”
German investors have also been active in the London market with Deutsche Asset Management, Union Investment and Deka Immobilien making significant acquisitions while Singapore’s sovereign wealth fund such as GIC, and Canadian pension funds such as CPPIB have all added to their UK holdings.
While traditional assets continue to hold their appeal, many investors are increasingly turning their attention to alternatives, a rapidly growing sector which is forecast to make up 30% of the commercial market for 2017.
Meadows added: “We’re seeing both domestic and international investors looking at sectors such as retirement living, healthcare, student housing and build-to-rent as areas of investment opportunity that offer value, and prospectively sustainable and resilient income streams”
But he warned that with Brexit very much an unfolding event, 2018 could bring many unanswered questions.
He continued: “Political uncertainty remains the biggest threat. and there are some big question marks over how the Brexit negotiations will unfold, especially in relation to migration and skilled labour, which have a major impact on the UK’s construction and service industries.”
“In the current environment, the market looks stable and while unlikely to deliver widespread growth, an increase in office rents is forecast to return from 2019. Office occupiers will seek flexibility, employees will seek the best places and location and asset choice selection will be key to investor performance.”