The impact from soaring interest rates on central London’s huge office market has been laid bare, as figures showed investor spend on buildings has slumped by more than 50%.
Provisional figures from property consultancy JLL for the Evening Standard show a “profound” slowdown in transaction activity in the first half of the year.
Rising borrowing costs will add further pressure to a commercial real estate sector many commentators have observed is undergoing big change as hybrid working remains popular.
The company forecast around £3.5 billion was spent on central London offices in the first six months of 2023, with the City accounting for £1.8 billion of the deals and most of the rest done in the West End.
The total investment volumes were 55% lower than a year earlier, and a 42% fall from the 10-year average.
Julian Sandbach, head of central London capital markets at JLL said: “The extent of the slowdown in capital invested in central London commercial real estate in the first half of 2023 is profound. The effects of rising interest rates have had a material impact on pricing and confidence as investors continue to seek higher returns to compensate for the margin required over the risk free rate.”
Sandbach added: “Whilst the level of completed transactions has reduced significantly, there appears to be more of an acceptance by owners as to where pricing has fallen to, despite the lack of transactional evidence for valuers to use, and we do expect to see more activity in the second half of the year, particularly if we see current acute volatility settle and positive messaging around the cost of money peaking.”
Asian investors were among the dominant buyers in the first half, and deals included Malaysian construction company Gamuda Bhd, together with a partner, buying Winchester House in the City for £257 million. A lease to Deutsche Bank is due to expire next year and the new owner plans to refurbish the property into a “ top-rated environmentally sustainable ESG office space”.
JLL calculates there is now around £1.8 billion of space under offer in central London.
While many companies are looking to downsize offices, including HSBC which plans to leave its Canary Wharf home, a number of investors are betting that employer demand for high end offices will be solid post-pandemic, even if staff are only in for a few days per week.
Gregor Wallace, a buying agent at Crossland Otter Hunt said: “The key for offices in 2023 is amenity, ESG and quality. Tenants can and will be picky and the secondary stock will have to be reinvented to alternative use.”
