The huge weight of money flowing into the London real estate investment market from the UK and abroad looks set to continue in 2015 with the level of demand far outstripping the available supply, according to the data from global real estate adviser Cushman & Wakefield.
A breakdown of the findings show that investment volumes in the City of London and Docklands reached just over £5 billion in the fourth quarter of 2014, the highest quarterly volume ever recorded in the market.
The report says that the strong end to the year meant that the annual total reached £13.8 billion, which is the second highest on record behind the 2007 peak of £13.9 billion. Indeed, half of all investment volumes in the final quarter were as a result of three transactions in excess of £250 million each, which reflects the annual trend and 48% of all 2014 investment volumes were due to 10 transactions above this threshold.
The report points out that increasing numbers of investors and surging volumes of equity are being invested into the City of London market with interest from a wide cross-section of investors, notably the world’s largest sovereign wealth funds.
It also shows that overseas investors remain the most active in terms of transactional investment volumes accounting for 78% of both the fourth quarter and annual total. Asian investors dominated fourth quarter investment volumes but over the year North American investors have spent the most money in London.
However, 2014 witnessed positive net investment from both Asia and the Middle East, while all other regions including the UK disinvested from the capital.
Due to exceptional demand, the market yields are being driven down for all investments with prime at 4.25 to 4.5%, albeit several transactions have completed below 4%, notably the Gherkin.
‘We saw a strong City of London investment market in 2014 with international investors dominating acquisitions. The international appeal of London continues with an ever increasing spread of new global investors entering the market and there are no signs of an imminent slowdown,’ said James Crawford, Cushman & Wakefield’s head of City of London investment.
‘Deals from £1 million to £1.2 billion closed during 2014 and capital values hit an all-time high of over £1,400 per square foot at the Gherkin. The first half of 2015 shows all the early signs of a continuation of last year but we expect some profit taking to occur later in the year and uncertainty around the general election in May,’ he explained.
‘We estimate there is £250 billion of liquidity in the market available for direct investment in property and when this is combined with an improving debt market, a severe supply demand mismatch will be created,’ he added.
The report also shows that the momentum recorded in the third quarter in London’s West End continued into the final quarter of last year when £2.4 billion was traded and this was the highest quarterly volume for the market last year and 10% ahead of quarter three volumes.
This brings total investment volumes for 2014 to £6.7 billion but, while above the 10 year average, the annual total lags the volumes recorded in both 2012 and 2013.
Overseas money continued to dominate the market and was responsible for 61% of volumes in the fourth quarter and 55% of the annual total. Over the year, North Americans were most active at 19% followed by European investors at 14%. UK investors disinvested from the West End over the course of 2014, but investors from all other regions were net investors.
Overseas private money has continued to dominate money into the West End, accounting for 27% of annual investment volumes although this is below the high point of 34% seen in 2013 as competition with other investor types intensified.
Funds, both UK and overseas, accounted for a higher proportion of investment volumes year on year, as they raised their allocation to property, while UK property companies have spent proportionately less money in the capital. Prime yields remained stable across the West End at 3.25%.
‘In 2014 we saw the return of the UK funds as major investors in the West End. The consequence of yield compression outside of London resulted in investors needing to focus on growth markets for returns, hence the surge of capital in the latter half of last year,’ said Andrew Thomas, partner in Cushman & Wakefield’s West End investment team.
‘As the prognosis for growth appears strong for the West End market, the outlook for 2015 looks positive, particularly for assets which allow for such growth to be captured early,’ he added.
