Foreign investment in London offices could rise to more than £10 billion ($14 bn) in 2021 is the optimistic prediction of estate agents Knight Frank.
Other firms and consultants, however, are less sanguine ( see below).
Knight Frank states that in the fourth quarter there were deals amounting to £4.9 billion raising the full year of foreign investment to £7.8 billion in 2020. This level, however, was well below average annual foreign investment of £12.5 billion in the past few years.
The firm continues to be optimistic about London’s office real estate, despite general worries about current and future impacts from Covid-19. Also due to the absence of a Brexit financial services deal City participants report that business is leaking to Paris, Frankfurt, Amsterdam and Milan.
Pent up investor demand resulted in several deals closing in December 2020, the firm said. An example was the insurance company Allianz’s £400 million purchase of a 75 per cent stake in a portfolio of listed property company, British Land.
“The momentum is expected to continue into 2021,” states Knight Frank. “The London office market now has 58 per cent more stock available than at the beginning of last year.”
Knight Frank’s “Global Capital Tracker” survey of potential foreign investors claims that £46 billion ($64 bn) of cross-border capital could flow into London’s commercial market. Between 2021 and 2025, the US could account for £13.4 billion, Greater China £11.9 billion, Germany £7.5 billion, Singapore £5 billion, South Korea £3 billion and India £504 million, Knight Frank surmises.
“Even in a globally stressed environment, international investors remain committed to London,” said Faisal Durrani, Head of London Commercial Research at Knight Frank. He added that London is perceived as a safe haven with relative liquidity, transparency, familiarity, time zone and language benefits.
“Clearly, the latest lockdown will dampen some of this momentum, but there are many investors keen to buy into the inevitable recovery,” Mr Durrani maintains.
Even though the pandemic has caused remote working, London could face a substantial shortage of premium office space in the long term, Mr Durrani predicts.
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During the third quarter last year, office rents in the City declined by £2.50 to £70 per square feet and the West End by £5 to £110/sq ft. “
Requirement levels have remained subdued, but there is evidence to suggest that occupier demand is being deferred rather than eliminated altogether,” Knight Frank contends. Leases are being renewed.
The cautious view
Deloitte’s late 2020 “winter crane survey” which monitors commercial property activity, does not reflect the super optimism of Knight Frank. Office Leasing demand “plummeted in the second quarter and demand remained low in the third, says Deloitte. “The lengthy lockdown raises further questions when London workers return to the office.”
Four in five developers contend that the weak leasing market is the biggest challenge to projects. Availability of finance, especially for speculative developments, is also a concern, the report states.
Deloitte’s latest survey found that there was a 50 per cent decline in the volume of new build and refurbishment projects. It estimates, however, that 48 per cent of new build construction was pre-let.
The total amount of office space under construction is 15 million square feet, but developments are taking longer to complete because of Covid restrictions.
Occupiers will be seeking quality, so landlords will have to refurbish to meet environmental and safe space requirements, the firm contends.
“An oversupply of poorer quality workspace is anticipated and is not expected to be absorbed even when the market recovers,” the Deloitte report said .
Estate agents Cluttons is also cautious. A short or medium term increase in occupier demand seems unlikely given the macro-economic background, the firm says. It also believes that businesses will have to upgrade accommodation. Leases will become more flexible with “frequent rolling break options”. The firm is also concerned that a financial services Brexit deal may not be negotiated until the end of 2021 and there will be less City business. There could be more office demand in accessible “fringe locations” such as Stratford, which has an airport.