According to CoStar's Just Released 2013 UK Investment Review, London Commanded £19.5 Billion of Office Investment in 2013, Compared to £12.6 Billion in New York City (at Current Exchange Rates)
by John Affleck (email@example.com)
To paraphrase Samuel Johnson’s famous quote, when investors grow tired of London real estate, they’ve grown tired of real estate.
In 2013, the UK real estate market was on its umpteenth cup of coffee: Per CoStar's newly released 2013 UK Investment Review
, an astounding £52.7 billion in commercial property traded last year, up nearly £20 billion from the 2012 total of £33.7 billion. The fourth quarter alone accounted for £19.5 billion.
As Mark Stansfield, CoStar’s London analyst, notes, "The combined factors of a low-interest-rate environment, easing eurozone instability, the UK’s economic turnaround and the wall of money coming from overseas created a tsunami effect, leading to an annual figure just shy of 2007’s debt-fuelled £56 billion -- which few observers would have predicted at the start of the year."
London commanded half of the total real estate investment in the UK, but accounted for the lion's share (80%) of the total office investment at £19.5 billion, (please see Exhibit 1 below). Put in perspective, office deal volume in New York City in 2013 totaled about £12.6 billion at current exchange rates.
Editor's Note: Copies of the complete CoStar 2013 UK Investment Review are available to CoStar subscribers. Please contact CoStar here to request a copy.
London’s preeminence as a real estate market has much to do with its status as the global crossroads for capital, especially from Asia and the Middle East: These buyers poured a net £5.1 billion into Central London, most of it in headline deals such as: Singapore’s GIC Real Estate’s acquisition of Blackstone’s 50% stake in the Broadgate portfolio for £1.7 billion; Middle East-funded AGC’s purchase of Citi Tower in Canada Square for £1 billion; and Abu Dhabi Investment Council’s purchase (with UK firm Finchatton) of 20 Grosvenor Square for £260 million.
In all, 15 of the 20 largest deals in Central London involved foreign buyers. Sellers, on the other hand, tended to be UK institutions, which divested a net £4 billion.
So far, however, foreign capital has yet to extend its reach into regional UK markets, despite extremely attractive pricing that CoStar first noted a year ago. Cap rates in regional markets have never been higher, either in absolute terms or relative to London’s rich pricing. Given those conditions, we anticipate more capital will flow into the likes of Edinburgh, Manchester, and Birmingham in 2014, especially from UK institutions redeploying proceeds from sales of assets in the capital. Large institutions, however, may find they simply cannot deploy enough capital outside of London, as even the largest office deals in regional markets rarely exceed £100 million.
The furious pace of investment in London highlights three truths about global real estate markets today. First, pricing in London (and other top-tier Western markets) still makes sense, particularly to Asian buyers: Yields offer a meaningful spread over local risk-free rates, a feature no longer on offer in many Asian markets.
Second, the persistent demand for deeply liquid Central London offices and the relative snubbing of high-yielding UK regional markets show that fear is alive and well among investors, however much greed may be driving capital toward Andalucía and Arizona.
Finally, investors are showing no signs of fatigue: 2014 kicked off with Kuwaiti-funded St. Martin’s £1.7 billion acquisition of the More London portfolio, and a rumored £25 billion in capital is vying for just £1 billion of available product in London.
To request a copy of the complete CoStar 2013 UK Investment Review, contact CoStar here.
John Affleck is a Research Strategist with CoStar in Boston.
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