In July last year, CBRE correctly predicted that 2023 would see an almost record-low year for London office investment volumes. The final figures show that they fell to £5.2 billion, the lowest in real terms since 1995 and little over a third of the 10-year average of £14 billion.
The reasons for this weak performance have been widely aired already, and whilst there is reason to believe 2024 will be better, all things are relative. CBRE is forecasting a 40% increase in volumes in 2024 compared to 2023, but even this would be lower than the totals seen in 2020, the first year of the pandemic.
However, whilst caution amongst investors was justified in 2023, I no longer believe this is the case and those who continue to make the decision to do nothing will miss a golden opportunity.
We saw pricing start to stabilise in the last quarter last year with yields having moved out to 5.75% in the City, 4% in the core West End markets, and 4.75% in non-core West End. Many assets which do not fit the definition of prime are trading at much higher yields than this, indeed at levels of pricing that we have not seen since the global financial crisis.
According to CBRE forecasts, the City is expected to outperform all other European office markets over the next five years for total returns as we see yield compression and strong rental growth.
Speaking to our City leasing colleagues, the volume of viewings in the City increased by 25% in 2023 compared with 2022, demonstrating a strengthening appetite from occupiers in London. Forecasts for the City show 5.1% annualized prime office rental growth for 2024 to 2028 and 125bps of yield compression, providing annualized total returns in excess of 10%.
With over £1 billion of deals having traded in December, we now have some valuable data to refer to. This, alongside the 5-year SONIA swap rate, which has fallen by 125 basis points since December, has led to increased investor confidence and we have most definitely seen an uptick in sentiment since the start of the year.
That extends beyond offices - we are seeing strong interest for core retail streets as rents have bottomed out and are starting to show signs of growth in various pitches. In Oxford Street alone there were 27 lettings completed in 2023, totalling around 200,000 sq ft, of which 19 were new entrants to the street and four new brands to the UK market altogether.
Looking ahead, the pipeline of transactions is healthy in the first quarter, with £1.8 billion of office investment under offer across London with a range of interest from a large cross-section of buyers including Japanese, Hong Kong, Singaporean and European investors. In particular, there is depth of demand for well-positioned value add opportunities, demonstrating a confidence in the future of office demand. Indeed, the opportunity is presenting itself to acquire some of London’s most prestigious assets at a discount to long-term pricing.
Ultimately, inaction is a choice. It is an active decision to do nothing which could result in a missed opportunity. The data points the market has been waiting for are here and now is the time to move. For those investors that have been bold, the opportunity has presented itself to acquire acres of some of London’s most vibrant and prestigious neighbourhoods in the City, Fitzrovia and Mayfair that take centuries to piece together and curate.
The can can’t be kicked any further….
Ed Bradley is head of London investment at CBRE
