The dominant position of London as the top European investment location has never been more apparent, with £29.5bn (€36bn) invested in 2013, close to three times the investment activity in Paris, and a sum greater than the other top five European markets combined.
Globally, London was only overshadowed by the total investment activity in New York, although annual growth in the top US Metro was lower at 17% year-on-year, with London up 33% on the year.
However, the 2013 highlight for the UK capital was the sheer weight of international capital focused on the market, with £18.2bn invested in London from cross-border investors.
While the rise of investors in Europe taking on additional geographic risk in 2013 demonstrated a growing desire for secondary locations and higher yielding assets, the exploration of existing safe havens to capitalise on strong growth fundamentals was also very evident.
Given the demand for investment opportunities in London, this is a trend most easily identifiable here, and in the rejuvenated new office village districts in the city environs.
The weight of capital focused on London office has resulted in a significant overspill of investment into different office areas of London. Looking at 2013 office investment activity in areas such as Covent Garden and Waterloo/Southwark, volumes are well above 2007 levels. The movement of high-quality tenants to growing office villages such as Soho, Noho and Marylebone/ Euston is encouraging investors to move beyond their traditional core market boundaries, as the opportunity to benefit from rental growth and capital appreciation in these niche areas becomes increasingly likely.
The vast majority of the London village markets (see figure) are at or above 2007 price per square foot values, mirroring trends highlighted in RCA’s Central London Repeat Sales Transactions index. The highest price per square foot and lowest yields are still reserved for the uber-prime office areas of St James, Mayfair, and Belgravia/ Knightsbridge. However, there are a number of other office villages in Central London providing higher yielding opportunities, with significant upside rental potential from shifting tenancy bases.
Office areas so far lagging in this recovery include Canary Wharf and Hammersmith, with volume and prices per square foot below peak market levels.
With secondary market locations in Europe offering high yielding opportunities in early 2014, the temptation to invest in anticipation of improved economic conditions is very compelling. However, the rewards could be that much greater for those with a strong grasp of local market conditions in already thriving urban areas.
Joseph Kelly is director of market analysis at Real Capital Analytics
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