Article Summary

Introduction

In a climate where positive news seems increasingly rare, recent findings from Savills have illuminated a silver lining in the heart of London’s real estate market. Savills’ latest research report, focusing on the West End, indicates an uptick in commercial real estate (CRE) investment, painting an encouraging picture for property investors and market enthusiasts.

Five Deals and a Thriving Market

The study shines a light on five significant CRE deals totalling a substantial £102.2 million that transpired in the West End during July. This boost brings the year-to-date turnover to an impressive £1.92 billion. Moreover, the research highlights a promising statistic: £4.1 billion worth of stock is available across 87 opportunities in the West End, representing the highest volume so far this year.

While this progress might be considered a recovery from a low base, it undeniably signifies a positive trend. When combined with Shaftesbury Capital’s recent announcement to sell £100 million worth of West End assets, it raises the question of whether confidence in the market is gradually returning.

Positive Momentum: More than Just Figures

Ros Morgan, CEO of the Heart of London Business Alliance, believes that these developments mark a general upward trajectory for the West End. She notes that footfall in the area has increased by an impressive 13% year-on-year, while international visitors have surged by 25% over the same period.

According to Morgan, the demand for smart and sustainable workplaces is on the rise, delivering the potential for prime rental growth and attracting billions in global capital to London’s real estate assets.

Fergus Keane, Head of Central London Investment Markets at BNP Paribas Real Estate, echoes this sentiment, emphasising that the West End remains a highly sought-after location for investors due to its strong fundamentals.

Strong Fundamentals and Diverse Appeal

What exactly are these strong fundamentals that continue to attract investors? Rental growth is a significant factor, as is the wealth preservation aspect of West End property. The district’s thriving leisure sector, attractive occupier base, and rental growth dynamics have long been magnets for investors.

Keane points to various factors contributing to the market’s success, including a lack of the right kind of supply, fewer stressed assets compared to other parts of the capital, and a preference for equity-based investments over debt.

Resilience in Uncertain Times

Chris Perkins, Head of UK Capital Markets at M&G Real Estate, highlights the resilience and value preservation of West End property. He notes that international investors, particularly private investors, seek “generational assets” that remain in portfolios for decades, without a priority for short-term returns. Additionally, investors from the Asia Pacific region, primarily led by Singaporean capital, and active US capital in the value-add space further contribute to the market’s vibrancy.

Challenges on the Road to Recovery

Despite these positive indicators, the market still faces challenges. Paul Cockburn, a director at Savills’ Central London investment team, acknowledges that while there have been improvements, the market still has a way to go on its road to recovery. He points out that turnover is still muted, making it early days in terms of an uptick. Price improvements are yet to be seen, but enhanced demand indicates a sense that pricing may be bottoming out.

Buyers, many of whom already possess assets, are increasingly seeing the defensive nature of the occupational market, especially in higher-quality stock. They are recognizing that offices have a place in a portfolio, provided they are the right ones.

Keane concurs that a full-scale recovery in asset prices hasn’t materialized yet, but he does note that there is more evidence of transactions taking place recently.

Factors at Play

Keane identifies the planning system as a substantial hurdle and suggests that planners may lean more favourably toward retrofitting. This could lead some investors to explore other areas as a result.

The legal challenge by Marks & Spencer over the refusal of its proposed redevelopment of the Marble Arch store, led by levelling-up secretary Michael Gove, remains a significant issue to watch closely.

Looking to the Future

Regarding the longer-term outlook, Cockburn suggests that the market may face challenges if continued macroeconomic uncertainty and rising interest rates persist.

Perkins emphasizes that while the current outlook appears positive, potential headwinds, such as lenders calling in loans, higher debt rates, and geopolitical risks, may emerge.

Despite these challenges, there’s a sense of optimism. BNP Paribas’ research suggests that the UK-wide CRE investment outlook may improve in 2024. The firm expects total volumes to reach £41 billion this year, with a 15% rise to £47 billion expected by the end of 2024.

Keane believes that some investors may remain cautious due to volatile conditions, waiting for borrowing costs to fall further. However, Cockburn highlights that a pricing recovery could be a lengthy process.

Perkins concludes on a positive note, asserting that a recovery in CRE investment, at least in the capital, may be quicker than in previous downturns. He notes that the West End’s market has an undersupply of grade-A offices, making it an attractive proposition for many overseas investors. As investors continue to comprehend the shortage of such offices and the lack of choices for corporate tenants, the focus on quality is likely to persist, ultimately driving strong rental growth.

Conclusion

In conclusion, despite the challenges, the West End of London is displaying resilience and positive momentum in its real estate market. As investors navigate these dynamic conditions, the market’s appeal endures, offering both attractive short-term returns and the promise of long-term value.

To learn about the property investment opportunities above, or to find out more about how property investment works, get in touch with the experts at North Property Group today.