Commercial real estate investment volumes in London are showing signs of recovery after two consecutive quarterly rises, according to the latest figures from BNP Paribas Real Estate.
Investment activity in the capital surged by 23% to £1.5bn in the final quarter of 2023. Provisional analysis of Q1 this year showed a further jump, to circa £2.5bn.
The figures are down from Q1 2023, when volumes exceeded £4bn. Researchers said that while both quarters were still below the long-term average, the data indicated the start of the recovery and a new investment cycle.
Charlie Tattersall, senior associate director, research, said: “UK real estate markets remain highly-driven by interest rate movements, but attractive fundamentals, including the anticipation of the first base rate cut in June, and signs of a trough in pricing, are gradually bringing more investors back to the market.
“Almost two years of outward yield shift means some market segments are offering decade-high income returns. Combine this with the window for capital value declines closing, this represents more evidence of the attractiveness of today’s pricing and so capital which has been on the side lines is starting to play.”
Fergus Keane, head of London capital markets at BNP PRE, said, “Confidence has been missing for two years, but if you look at our data on the market, two consecutive quarterly increases in investment volumes certainly signals the start of its return.
“It’s often only with hindsight that you can see when one cycle ends and another begins, and the trigger is often a spate of deals that turns sentiment and begins to build real momentum. It’s clear to me that some of those moments have arrived.”
Keane said a series of deals supported the view that the market is liquid and the process of price discovery has completed. Those included:
- Blackstone’s £230m deal at 130-134 New Bond Street, W1, at sub 4%, reflecting a core play with core-plus returns potentially on offer;
- BT group’s £275m sale of the BT Tower, W1, to MCR hotels, signposting “a huge display of confidence”;
- Nomura’s £64m purchase of 55 St James’s Street, SW1, at 4.25%, suggesting core money may be returning;
- Royal London’s £192.5m purchase of a 50% stake at British Land’s 1 Triton Square, NW1, marking the “beginnings of a shift in sentiment”.
Keane said: “There is naturally still hesitation in the market and some are holding out for further evidence that the challenges of 2023 are behind us. A small proportion of investors appear to believe capital values will soften a little further. Another slice appears to be anticipating more bank-led sales at bargain prices, while others are waiting for stock levels to rise, given the fact that some potential sellers think they will get a better price later this year.
“But the activity in the market is increasingly contradicting these positions and I am confident that we are now at the start of a new investing cycle.”
BNP PRE also found “strong” rental prospects across the office sector, supporting early signs of recovery.
Prime office yields in the West End and City markets were steady at 4%-4.25% and 5.75% respectively.
Prime office rents in the West End stand at £150 per sq ft, 7.1% higher than the previous year. The firm has forecast 14% growth through to 2026.
Prime office rents in the City stand at £75 per sq ft and are predicted to climb by around 9% through to 2026. The best spaces already command £95 per sq ft.
Tattersall said: “It remains the case that those who are able to overcome financial market volatility and deploy capital are likely to reap the rewards of inflation-beating rental growth in the years to come. Early movers that are able to offer best-in-class business space into a recovering market stand to make sizeable gains as borrowing costs fall.”
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